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Evolving occupier trends in office sector

Technology firms and agile space operators have emerged as the key drivers of office space demand.

AGAINST Singapore's economic diversification efforts to shift away from an over-reliance on key industries such as manufacturing, finance and insurance, the office real estate market has also witnessed changing occupier trends in the past 10 years.

Besides the government's nationwide push to embrace technology and digitisation, its continued efforts to support small and medium enterprises (SMEs) have progressively shaped the occupier profiles where the shift in demand is apparent.

Looking over a five-year period, technology firms and agile space operators (including serviced offices and co-working spaces) have progressively emerged as the key drivers of office space demand over the years - cumulatively from 8.3 per cent (2009 to 2013) to 34.5 per cent (2014 to 2018). This is in stark contrast to a decade ago (2004 to 2008) when demand was traditionally driven by the banking and finance sectors.

What has been particularly encouraging is that leasing activity by technology firms has not been solely contributed by international technology multi-national companies (MNCs) but also by homegrown technology startups, which accounted for a significant proportion.

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What is the catalyst?

Ample liquidity has been the key catalyst in transforming startups into unicorns. Singapore has built a thriving entrepreneurial ecosystem which includes a robust incubating infrastructure and various financing schemes where startups can get funding through corporations or institutional investors, as well as through incubators and investments via the government programmes.

As the startup and investor communities grow larger and more sophisticated, there was a surge in fundraising and a corresponding increase in enterprise formation. In 2017, the amount of funding tripled to S$10.13 billion. Likewise, the rate of SME formation quickened at a pace of 2.7 per cent y-o-y.

In 2018, investors continued to pump in more funding, where overall funding value reached a new peak of S$13.87 billion. The vibrancy of the startup scene seems to be two-way - the success stories of local enterprises may have attracted a growing pool of investors, which in turn, fuel further growth in the number of SMEs.

Over the past 24 months, several sizeable homegrown firms, such as Grab and Razer, have expanded significantly. In 2019, Grab received double capital injections of US$300 million from Invesco Ltd and US$1.46 billion from SoftBank Vision Fund, while Razer raised US$528 million during its initial public offering in 2017. As a result of the successful funding rounds, both homegrown technology firms have expanded and begun to construct their new headquarters in one-north.

While it has been the big-name startups that have grabbed headlines, there are also many other smaller scale startups and SMEs which have raised money, albeit in smaller amounts.

Anecdotally, these new firms tend to favour the flexibility that agile space offers. Compared to a traditional lease that will bind them to physical premises for a traditional lease term of three years, agile spaces provide these startups with benefits such as lower capital expenditure, greater networking opportunities, and the ability to be working in prime locations at a lower cost. Consequently, the growth of these SMEs has fuelled the expansion of agile space market.

Landlords and tenants embracing agility

In today's fast-changing business climate where companies need to stay nimble, their appetite for agile space has also increased. Agile space refers to serviced offices and co-working spaces, and companies are increasingly viewing them as part of their workplace strategy in optimising occupancy costs, and not solely as physical work premises.

Consequently, there was a booming growth in the agile space market. From 2013 to 2018, the number of agile space locations doubled, while the market size tripled. While this represented 5 per cent of Singapore's total office stock at 3.06 million square feet as of 2018, the supply of agile offices will continue to grow as landlords are acknowledging that office demand has progressed with the times.

While the predominant users of agile space are startups, there are increasingly more large corporates and MNCs embracing it. Some of these MNCs adopt a workplace strategy called the core + flex model, which involves locating a company's main headquarters within a traditional office space, while taking up a "flex" portion from an agile space operator - creating scalability in space efficiency.

Landlords are also welcoming agile spaces within their buildings, as they jostle for market share in this sector as well as for the provision of such agile options for their tenants. Based on CBRE Research's office building basket, two out of five office buildings now feature a flexible office component.

Technology will keep it relevant

Besides the transformation in the physical office space use, technology is increasingly playing a larger role in delivering a more efficient usage of space and improving overall user experience. According to the Ministry of Manpower, an average employee in Singapore spends about 44.8 hours per week in the office. Therefore, an optimised workplace experience is becoming a priority - made possible through a solid digital infrastructure, proactive landlords and a slew of avant-garde technology tools.

Space requirements are also typically reduced - further enhanced when a company switches to cloud computing, hence eliminating the need for in-house servers. By outsourcing these IT infrastructures, companies can opt to either relocate into smaller office spaces or reassign the excess space for other uses. Some relocations of financial institutions have reportedly seen an average decrease in space requirements ranging from 15 per cent to 30 per cent.

Looking ahead, Singapore's economy is slowing down, with lower annualised GDP growth likely to be a new norm. This is on the back of the Ministry of Trade and Industry's advance estimates which trimmed its forecast for GDP growth to between 0 per cent and 1 per cent in 2019.

Coupled with lurking external headwinds, more firms will look to execute workplace strategies that will provide them with a higher level of agility. This is made possible with the usage of technology, which has propelled occupiers to be the centre of focus. With ongoing innovations in technology and changing workforce demographics, Singapore's office landscape will continue to be shaped by the continued convergence efforts made by the government, landlords and occupiers. Offices will soon become digitised and agile.

  • Desmond Sim is the head of research (Southeast Asia), Lim Lay See the co-head of office services (Singapore), and Yuki Suzuki the assistant manager (research) at CBRE