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Beyond the core: Singapore's office decentralisation
WHEN property developer Ho Bee Land bought a commercial site at North Buona Vista Drive for S$410.99 million in 2010, observers said then that the resulting office product would be untested for the area. The project, sited outside the Central Business District (CBD) in a university and R&D enclave, was targeted at multinationals keen to set up headquarters near their research facilities. But as Ho Bee tells The Business Times, getting corporates to sign up "was not easy, as one-north is not known as an office location. We struggled initially." As the one-north MRT station and retail mall Star Vista were built up, Ho Bee's move paid off. Since completion in 2013, that building, The Metropolis, has contributed significantly to the company's annual bottom line, with rental income accounting for 42 per cent of its revenue in FY2018. Today, The Metropolis is fully occupied.
The Metropolis is one of several "decentralised" office spaces in Singapore that have sprung up over the years, as the government continues its efforts to build employment areas outside the CBD - in line with a decades-long policy to put more jobs outside the city centre. Plans are already in the works for three major economic gateways in Singapore's east, west and north, including a second CBD in Jurong Lake District.
Taking things a step further, the government just this week announced plans to encourage more non-office use into the CBD, which could change the make-up of the country's traditional business hub and lead more office tenants to move outwards.
Offices outside the CBD see good take-up rates today, though industry players say a cocktail of considerations - ranging from cost to occupier profile - weigh on corporates' minds.
For well-established non-CBD markets, Grade A office vacancy rates were tight as at Q4 2018: under 1.5 per cent for Tampines, Jurong, one-north and Novena/Newton, according to Cushman & Wakefield data.
Offices there have attracted big names too. In 2015, Daimler signed on to Westgate Tower in Jurong from Centennial Tower, reportedly saving 30 per cent in rental in the process.
Government entities have also moved out of town, with the Agri-Food and Veterinary Authority (AVA) and the Building and Construction Authority (BCA) moving to JEM in Jurong, and the CPF Board moving its corporate functions to Novena from the CPF Building in Robinson Road.
Those moves were likely driven by both push and pull considerations: certain businesses (or parts of the group) do not require a prime CBD location for their local or regional operations, or they would benefit from proximity to the industrial activities in the west region. "Thus the continued expansion of employment areas outside the CBD will increase the offering of alternative options for business space, catering to a wider range of businesses," says a URA spokesperson.
Demand and supply
Still, office decentralisation has not been an easy sell.For one, the rental differential between CBD and non-CBD office space is still too narrow to get more occupiers to shift, because there has been relatively little new supply outside the CBD as opposed to within in the last decade, say some analysts.
The government has been proactive in managing business costs here, says Christine Li, senior director and head of research at Cushman & Wakefield. "That's why when you see when there is a tightening of CBD supply, they try to release land early to make sure there isn't a shortage of supply."
This was particularly so after a supply squeeze about 10 years ago led office rents to shoot up.
Until the recent completion of Paya Lebar Quarter's office towers, The Metropolis was the only prime decentralised office completion of at least 500,000 sq ft in NLA (net lettable area) from public land sales initiatives since 2007, according to JLL statistics.
Meanwhile, there was a relatively large amount of CBD prime office space added in the same period, including about three million square feet at Marina Bay Financial Centre and about two million square feet at Asia Square Towers 1 and 2.
Thus, the rental gap between the CBD and outer districts narrowed to 32 per cent in 2018 from 56 per cent in 2007. JLL believes it would take a more-than-50 per cent differential to get an occupier to consider giving up the prestige of the CBD for an out-of-town location.
Supply also weighs on leasing decisions in other ways. With office leases running typically at three to five years, occupiers can "time the market" based on new supply and economic cycles to get attractive CBD rents so that they do not need to be looking for alternative space in decentralised locations, points out Ms Li.
A URA spokesperson tells BT: "We will monitor the demand for office space, in consultation with the economic agencies, and will calibrate the pace of office supply release across the different employment areas carefully, so as to meet economic and planning objectives as well as market demand."
Non-cost considerations can also weigh on an occupier's mind and lead it to stay in the CBD. Talent retention is one such concern.
Jason Seng, Singapore leader for Deloitte Human Capital Consulting, says: "In many cases, employees tend to be resistant to location changes especially if the company has been in the current location for a considerable period of time. Many employees might also have built their own family, life and fitness routines around their work location so any changes would mean a potentially significant amount of rescheduling of daily personal routines."
Companies that manage effective location moves tend to communicate the move very early on and then at regular intervals for employees to accept and plan for the transition, he adds.
Financial incentives and more childcare support or allowance, along with on-site facilities like fitness, childcare and dining can help. For that reason, landlords in non-CBD spaces push hard to get occupiers' interest, often by building enticing amenities and engaging in placemaking efforts.
Metropolis landlord Ho Bee says: "Many corporates still have the impression that non-centralised offices tend to be of lower specifications and does not have state-of-the-art facilities and amenities.
"To show our commitment to re-define Grade A office outside of the CBD, we built an actual size mock-up of our triple volume lift lobby in a warehouse during the construction phase of The Metropolis to convince prospective tenants of the quality we were committed to." Ho Bee also placed sculptures around the building and organises events like lunchtime performances.
At the office and business park behemoth Mapletree Business City, Mapletree Investments built almost three hectares of lush greenery, provides art works around the premises and curates programmes like Zumba classes.
"Mapletree successfully transformed the precinct into an established business hub with a conducive environment that attracts the global best. Multinational companies, such as Medtronic, Cisco Systems and Google, have chosen to base their offices here," says Amy Ng, regional chief executive officer, Group Retail and Singapore Commercial, Mapletree Investments.
Drawn beyond the centre
Another burden holding companies back is simply inertia. As Chris Archibold, head of leasing, JLL Singapore, tells BT: "It's much easier to make a decision made by the path trodden by the other people first... Occupiers like to make a safe decision."
Several factors are likely to galvanise change in the near future. Office supply dynamics look set to be more favourable now, Ms Li of Cushman & Wakefield notes.
The just-announced CBD Incentive Scheme, which will offer an increase in gross plot ratio to encourage conversion of some existing office developments to hotel and residential uses when the Master Plan is gazetted, could lead to more supply being taken off the market for redevelopment, says Ms Li. More firms could move out of the CBD as a result.
At the same time, decentralised supply for out-of-town office space will be forthcoming as the government progresses with its vision for new growth hubs like the second CBD, Jurong Lake District.
Cushman & Wakefield has predicted that decentralised areas will account for nearly 30 per cent of Singapore's total office stock from 2023 and onwards, from the 17 per cent currently.
There are other reasons why office decentralisation will gain more acceptance. More companies are adopting a "hub-and-spoke model" in their real estate needs, with an office in town and satellite offices elsewhere, Desmond Sim, head of research for Singapore and South-east Asia, CBRE observes.
That includes the likes of CBRE, which will split its operations between the new Paya Lebar Quarter and its CBD office. That's helped by the widening transport network in Singapore over the years, with more lines like the Thomson East-Coast Line and Cross Island Line on the way.
Mr Sim says: "The quality of built-up space as well as amenities in the decentralised areas are the same quality in terms of what is being delivered in the CBD. The only difference is location, which is compensated by rental differences."
Technology may also kickstart new demand. After all, with smartphone and laptop in hand, it's now possible to work anywhere, anytime. Banking on the new mobility, flexible working space providers like IWG have also set up shop beyond the CBD. It has taken up space in places like United Square, Tampines Junction and Vision Exchange, and is set to open a Spaces location at Paya Lebar Quarter.
Betül Genç, IWG's country manager, Singapore, explains: "IWG believes in providing flexible workspaces across the island, not just within central business districts, to address the needs of our mobile workforce - from giving people personal time back to connectivity and improved productivity."
Some analysts also believe that a recent trend of technology players taking up business park space outside the CBD could continue, in part driven by the differences in rents between offices and business parks.
According to Cushman & Wakefield, Grade A CBD office rents stood at S$10.37 in Q4 2018.
Meanwhile, it was recently reported that Google was in advanced talks to take up a massive 400,000 sq ft space at Alexandra Technopark, where they might pay as little as S$4 psf; the tech titan already occupies about 500,000 sq ft at Mapletree Business City II after relocating from Asia Square.
Ride-hailing app Grab - which has four offices in Singapore at Midview City, Marina One, Cecil Street and Guoco Tower - also recently announced a build-to-suit new headquarters in one-north costing S$181.2 million.
JLL's Mr Archibold says: "(These companies) are the ones that all the graduates want to work for, so they are going to go wherever those occupiers go. They are big enough and well-funded enough to create their own environment."
That's not new, of course; tech is also out of town in the Silicon Valley.
The CBD here remains as the core financial and business hub, a URA spokesperson tells BT. To be sure, most experts think some sectors, like banking and finance, will always crave the prestige of the CBD address.
With new economic gateways to have their own specialisations like food in parts of the north and aviation in parts of the east, Knight Frank's senior director and head of research Lee Nai Jia notes the benefits will come in labour pooling and sharing of infrastructure.
There are also benefits of clustering multiple industries together in the same space, sparking collaboration organically, adds Dr Lee.
Co-working space provider JustCo's CBD centres attract financial services, law firms, business consultancies, fintech and large corporates.
According to its founder and chief executive Kong Wan Sing, large corporates "typically require a centralised office location to be near to their clients, and often prefer a premium office address. Proximity of our community is also key, and can be a huge advantage to members, as it makes it easier for members to cross-network, spark meaningful conversations and collaborate, in turn driving success to each other's business."
What of the CBD?
Meanwhile, the government has plans for a larger live-in population in the Central Area, with homes to come in Downtown, Marina South and Rochor, going by the recently released Draft Master Plan 2019.
There is potential for over 20,000 more homes to offer a greater variety of housing choices in the city, a URA spokesperson says. That's on top of the potential residential and hotel uses that could come from the CBD Incentive Scheme.
CBRE's Mr Sim says moves like these "spread out land use to be more efficient; if not land use is only from 8am to 8pm". For older offices in the traditional CBD, the new incentive scheme could mean a wave of renewal.
Yet these best-laid plans might be unpicked by deep-seated preferences and unexpected market behaviour.
Executive director for ZACD Group Nicholas Mak says that if the government wants to attract more "average Singaporeans" to live in the CBD, the homes have to be affordable, but selling land to the highest bidders will only result in pricey condos.
"It is more economical to live in the suburbs and commute to work daily... Furthermore, if you work five days a week in the CBD, do you still want to spend your weekends in the CBD? Or would you rather spend your leisure time away from your place of work?"
On the other hand, Dr Lee of Knight Frank notes: "Interestingly, if there are plans for more living-in and to make the CBD more vibrant, then it makes centralisation more attractive."