‘Tech’-ing a reality check – what’s in it for the office market?
Though overall leasing activity is poised to ease, the silver lining to weakening demand lies in the tight future supply
FIRST, the global tech titans came. Apple and Microsoft have been in Singapore since the 1990s, while Google, LinkedIn, Twitter and Salesforce made Singapore their Asia-Pacific headquarters in the 2000s. Then in the late 2010s and early 2020s, Chinese tech giants such as Alibaba, Tencent and Bytedance arrived.
Singapore: Silicon Valley of Asia?
By now, more than 80 of the world’s top 100 technology firms have a sizeable presence in the aspiring Smart Nation. Singapore’s strong economic fundamentals, business-friendly reputation, and its strategic location in the heart of South-east Asia have made the Republic an attractive location for tech companies hoping to set up here to tap the opportunities in Asia. In addition, its political neutrality, world-class digitalisation and innovation mindset allow tech capital and entrepreneurship from the East to the West to flourish.
After the global financial crisis, the tech sector picked up some of the slack left by the financial services sector, becoming one of the key demand drivers in Singapore’s prime office market. In the last few years, new tech set-ups as well as a rapid expansion of incumbents took up some of the largest and newest prime office space in the city centre.
An analysis by CBRE Research found that over the past four years, the amount of Core Central Business District (CBD) (Grade A) space occupied by the tech and the information and communications technology (ICT) industries has risen by 41 per cent, resulting in a market share of 14 per cent by the end of 2022, from 11 per cent in 2018.
On the other hand, the financial services sector’s market share shrank from 45 per cent to 31 per cent over the same period.
For instance, Facebook occupies approximately 0.4 million square feet (sq ft) of office space in South Beach and Marina One. Bytedance, the parent company of TikTok, has office locations across three prime sites – One Raffles Quay, Guoco Tower and Capital Tower.
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Amazon occupies offices in Asia Square, One George Street, Capital Square, and has a large presence in a CBD co-working facility. More recently, the company committed to leasing 0.37 million sq ft at IOI Central Boulevard Towers.
Market sentiment around tech turns cautious
However, nearing the tail-end of 2022, leasing sentiment became more cautious. The series of announcements from tech firms involving large-scale job cuts dampened market sentiment across the office sector. While tech firms had an outsized appetite for prime spaces, generating some 40 to 50 per cent of leasing deals on average over 2019-2022, leasing demand by tech firms is expected to slow amid the current period of hiring freezes.
Some tech companies have also begun rightsizing or offering their office space on an early-surrender basis to contain costs, evidence that the tech sector is not immune to the current economic cycle.
According to CBRE Research, total shadow office space (excess space on an existing lease obligation that a tenant would like to give up by finding a replacement tenant for the landlord) in Singapore is estimated to triple. Of that, 64 per cent will be released by the tech sector – the largest being some 0.2 million sq ft of office space at Rochester Commons in the one-north area, given up by a major e-commerce player.
Therefore, the emergence of such space presents opportunities for occupiers seeking to upgrade, as quality office space has historically been tightly held and is rare to come by. Tenants who are inclined to reduce their footprint can take this chance to upgrade to smaller but better-quality offices.
Which sectors could help pick up the slack?
That said, not all sectors are experiencing a downturn. Some sectors, such as non-banking financial institutions, fast-moving consumer goods (FMCG) and the co-working space market, are enjoying a structural recovery. Net expansion in 2022 was also driven by banking and finance, with the emergence of new set-ups in wealth management and family offices.
Singapore has always been highly regarded as a safe haven for investments, with its track record as a key financial and wealth management hub, and for supporting investments in the region.
Its status as a financial hub will be further cemented via the Singapore Financial Services Industry Transformation Map, which aims to grow the industry at an average annual rate of 4 to 5 per cent from 2021 to 2025, and create 3,000 to 4,000 net jobs on average each year.
This also leads to a trickle-down effect, with higher demand for supporting industries such as those in legal and tax advisory, real estate and insurance services. Thus, the banking and finance sector will be primed for growth.
The FMCG sector is also expected to see good traction, with improved consumption levels driven by recovering tourism numbers. Meanwhile, the co-working space market could be primed for expansion as utilisation rates for co-working offices continue to improve, due to the return-to-office trend.
Furthermore, co-working space could become a pivotal solution for occupiers who require more flexibility during this period of uncertainty to plan out their real estate needs.
Therefore, with the tech sector set to take a breather, leasing activity is likely to be more broad-based in 2023.
However, it is important to note that while enquiries from these emerging sectors have picked up, it may not be sufficient to pick up the slack from weakening office demand in the tech sector. These sectors typically comprise mid-sized occupiers (10,000-30,000 sq ft). In comparison, leasing requirements from tech companies stretched to more than 100,000 sq ft during the boom period.
Silver lining in tight supply
Though overall leasing activity is poised to ease, the silver lining to weakening demand lies in the tight future supply. The five-year future islandwide office supply is estimated at 0.97 million sq ft per annum, 31 per cent below the 10-year historical average of 1.41 million sq ft.
Core CBD (Grade A) future supply remains extremely limited on the horizon, with only one development, IOI Central Boulevard Tower – a sizeable 1.26 million sq ft building – expected to complete in 2023.
The tight supply situation will also be compounded by the removal of stock in the CBD, such as Fuji Xerox Towers, Clifford Centre and PIL Building, as well as potential redevelopments steered by the CBD Incentive Scheme.
With the government’s key focus on decentralisation, new supply is slated to be outside the CBD.
One area of interest is the Jurong Lake District, where the government has released a mixed-use site via the H1 2023 Government Land Sales Programme, where it could potentially yield 150,000 square metres in gross floor area of office space.
There is reason to believe that the tech sector will steer towards recovery, and the uncertainty in this sector may only be a brief moment in time. Singapore remains a regional hub and the sector is expected to continue on the path of growth in the long term.
The government has continually reaffirmed its focus on the digitalisation and transformation of Singapore’s industries, with the Smart Nation initiative currently taking root. Successful implementation of these plans will help pave the way for more sustainable growth from the sector.
David McKellar is co-head of office services, Singapore and Tricia Song is head of research, South-east Asia at CBRE
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