Redevelopment may head off office market blues

Singapore

SINGAPORE office rents are easing amid a drop in demand as businesses go into cash-conservation mode amid a recession, prompting some to downsize their headcount.

However the limited completion of new CBD Grade A offices this year and next should mitigate the rental drop. Another silver lining may turn up in timely fashion - the redevelopment of ageing office blocks in the central business district (CBD), spurred by an incentive scheme unveiled by the Urban Redevelopment Authority last year to rejuvenate the old CBD.

So far, owners of at least two office assets - AXA Tower and Fuji Xerox Towers - have shown their hands. City Developments has said that it is actively studying the feasibility of redeveloping the 38-storey Fuji Xerox Towers along Anson Road.

A Singapore subsidiary of Chinese e-commerce giant Alibaba Group has teamed up with a Perennial Real Estate-led consortium to redevelop AXA Tower near Tanjong Pagar MRT Station.

"Upon serving notice, there will be close to 700,000 sq ft of tenant-leased space that will become displaced at AXA Tower," said Mark Lampard, executive director of regional tenant representation at Cushman & Wakefield (C&W). "While AXA Tower has not kicked its tenants out, it is forcing its occupants to plan for this eventuality. And whilst deals are not happening immediately, leasing enquiries are taking place - and this is the first step in renewed demand," he added.

BT understands that AXA Tower's redevelopment could begin in the late-2021 to early-2022 period.

A similar situation may unfold at Fuji Xerox Tower, which has 353,575 sq ft net lettable area.

Buildings coming up for redevelopment may be a source of unforeseen leasing demand for offices, said observers. "This may go some way towards mitigating the decline in office rents in the next 12 to 18 months," said Michael Tay, head of capital markets and joint head of office services at CBRE.

Savills Singapore's executive director of commercial, Ashley Swan, said a flurry of leasing activity as tenants in buildings coming up for redevelopment scout around for replacement space would provide a welcome fillip to leasing transaction volumes - roughly six to 12 months prior to demolition. It will also help absorb vacancies.

Property viewings - including by prospective office tenants - were not allowed for nearly two-and-a-half months during the "circuit breaker" partial lockdown to contain the transmission of Covid-19. The resumption of property viewings from June 19 has resulted in an uptick in viewings of office premises, said Mr Swan. "It will take a few months to see if this will result in leasing transactions."

Mr Lampard recalled that when Covid-19 struck, office leasing demand "hit a brick wall".

"With Singapore clocking up 1.3 million sq ft average annual net absorption of CBD Grade A office space over the past 10 years (2010-2019), to have demand stall is a challenge." C&W's research head for Singapore and South-east Asia, Christine Li, forecasts about 380,000 sq ft net absorption for the whole of this year.

JLL's head of leasing for Singapore, Chris Archibold, said: "Some companies are giving up space for sure. Some are growing for sure. But most are just hunkering down, staying as is, renewing where they are, waiting to see how the business environment picks up."

E-commerce and online players are doing well; in general, most established tech companies are doing well. "But the ones that are not making profits or in startup mode - and there are a lot of startups in Singapore - you've got to ask the question of how many of those will survive a recession," said Mr Archibold.

"What's obvious in every single recession - and we're in one - is that people are very, very conservative about how they lend money. If you're a startup looking for funding, that now all of a sudden becomes very hard, especially when you don't have profits," he added.

In a more positive note, C&W's Ms Li said the recent resumption of business in China is resulting in Chinese tech companies - in particular, players in the Internet economy and data analytics - re-activating plans to seek office expansion space in Singapore. "The expansion of biomedical and pharma sectors will also result in a spillover of corporate space requirements," she added.

C&W figures show that the average CBD Grade A office rental value has eased 2.7 per cent since the end of last year and Ms Li forecasts a full-year decline of about 10 per cent. Last year, rents rose 2.8 per cent.

Mr Swan of Savills said an interesting thing to watch out for is a pick-up in shadow space - or excess space on an existing lease obligation that a tenant would like to give up by finding a replacement tenant for the landlord. "A landlord may say its building has 100 per cent occupancy but there are tenants in the building that are looking to give up space, thus adding to the stock of space available for lease. Moreover, an increase in shadow space is an indicator of business performance."

Meanwhile, the jury is still out on whether the prevalence of work from home (WFH) during the pandemic is going to be a permanent solution and therefore lead to businesses occupying less office space. This is a topic on everyone's mind - but it is still too early for an answer, said office industry observers.

Mr Lampard gave his take. "With the 'crash course' on remote working, businesses are seeing what agility really means to their organisation. Some will struggle, others will thrive." The key result is that firms will have a much clearer understanding of their ability to implement greater agility solutions and their ability to reduce their real estate footprint.

"On the flip side, new safety restrictions will mandate the need for greater distance in between staff points and larger areas where staff congregate. The impact of these regulations and safety protocols is the need for 'additional space' to accommodate staff.

"So when we take both of these forces into account, we are likely to see space reduction and space expansion balance each other in the short term. However, in the longer term, we believe that organisations will increasingly implement alternative strategies that allow them to reduce their real estate area."

While there is no rule of thumb as to what organisations will target for space reduction, Mr Lampard offered a few parameters based on the business plans and performance of occupiers. Companies that have seen their business models significantly impacted by the pandemic (such as airlines and retail) will focus heavily on cash flow and the potential for real estate cost savings.

Organisations that are using Singapore as a launch-pad for their Asia-Pacific business may become more conservative and focus on their core markets, resulting in a tempering or reduction of major expansion plans here. "Conversely, organisations that are growing rapidly, such as technology companies, may accelerate their expansion plans to seize market share or opportunity. Case in point is the rapid hiring of staff by Amazon in the US," said Mr Lampard.

Mr Tay of CBRE argued that WFH may lead to loss of elements that are critical to an organisation such as branding, building up a corporate culture and the ability to cultivate staff loyalty and rootedness to the company which are important for talent retention. This is particularly important for a very competitive talent market like Singapore, especially in the tech sector.

"After the pandemic ends and when things start to normalise, one may find that social interaction both among colleagues and with external partners/clients may not be so effective in a WFH environment."