2020 rental declines up to 15 per cent forecasted
Demand for Grade A office space has declined 45 per cent, from 10.1 million sf in the first three months of 2020 to 6.9 million sf in the second quarter of this year in the Asia Pacific region although it remains in positive territory, according to Cushman & Wakefield’s latest report Reclaim 2020: H2 Insights. Cost containment and capital preservation remain key strategies moving forward as regional net absorption continues to witness a decline.
“Although the region entered the pandemic in a relatively robust shape, COVID-19 has exposed pockets of weakness which emerged since the start of the year and accelerated the earlier predictions of a weakening of the office market,” said Mark Lampard, Head of Singapore Commercial Leasing and Regional Tenant Representation at Cushman & Wakefield. “We expected neutral markets to become more tenant friendly and landlord friendly markets moving to a more neutral, or even tenant friendly position, and this has unfolded more rapidly than expected. As at Q2 2020, just four markets, Bangkok, Ho Chi Minh City, Manila, and Taipei, in the Asia Pacific region remain landlord friendly, down from 11 at the start of the year and all four are reporting softening conditions.”
Widespread rental decline can be seen across the region in Q2. While there are green shoots of emerging economic recovery, sectors such as office, retail and hotel will lag this recovery and likely continue to soften over the next six months. Total rental declines for the year are expected to range up to 15 per cent for markets that were already encountering headwinds prior to the pandemic. The vacancy outlook is much more nuanced, reflective of the wide range of conditions prevalent in each market, such as in Tokyo, as they entered the pandemic with a vacancy rate of less than two per cent, while vacancy rates in other markets like Malaysia, Jakarta and many China markets were over 20 per cent.
“In periods of uncertainty, conservatism becomes prevalent, as seen in the first two quarters of 2020. We believe markets will not remain subdued for a long period of time and a return to activity and demand is expected, though the timing of that return will vary between markets. In Singapore, taking into consideration the prolonged period of working from home and the forthcoming new supply, many occupiers are reviewing their footprint needs, evaluating how they utilise the space and assessing different buildings’ ability to cater for more flexible work arrangements.” Lampard added.
The Singapore market is expecting Grade A office supply to hit a peak of 1.9 million sf in 2022 before it falls to 0.5 million sf in 2023.
From a corporate occupier perspective, market uncertainty has led many non-business-critical decisions to be put on pause. New enquiries for space were down and regional net absorption has softened further from 10.1 million square feet in Q1 2020 to 6.9 million square feet in Q2 2020, which is 30 per cent of the three-year rolling quarterly average.
Within this overall figure there are some brighter spots. Indian markets, specifically Hyderabad and Mumbai, recorded 3.7 million square feet of positive net absorption in Q2, albeit this was a 50 per cent decline quarter-onquarter and the softest result since 2013. On a brighter note, Tier 1 markets in China returned to positive net absorption after a particularly soft first quarter. While these may only be considered mildly positive, they stand in stark contrast against the almost 22.8 million square feet of negative net absorption recorded across US markets, further highlighting the resilience of the region so far.
“The impacts of COVID-19 have been swift and dramatic, with further downside risks likely to echo for some time yet. However, just as boom cycles come to an end, so too do bust cycles. There are green shoots of economic recovery already emerging across the region. The outlook for different markets will look different as it is tied very closely to their ability to keep the virus contained,” said Dr. Dominic Brown, Head of Insight & Analysis, Asia Pacific at Cushman & Wakefield. “The speed at which market changes occur will therefore vary, requiring a proactive and flexible approach from both occupiers and investors alike.”
Overall, space needs are evolving, driven by cost reduction and greater employee flexibility. The speed at which these workplace strategies can be deployed is dependent on several factors, but ultimately require the alignment of financial goals with corporate real estate strategy, HR policies and change management practices. The corporate strategies put in place will be key in driving market outlook, and this will continue to play out over 2021 and beyond.
Reclaim 2020: H2 Insights highlights the impact of the COVID-19 pandemic in Asia Pacific and the progress of recovery. The report discusses where green shoots of opportunity are emerging, and further insights to how investors, landlords and tenants should make real estate decisions in this environment. Click here to download the report.