Office

A HYBRID OFFICE

At the onset of the COVID-19 outbreak, safe distancing and circuit breaker measures led to telecommuting as the default working arrangement. This trend is expected to continue in 2021, with many firms announcing plans to allow workers to work from home till mid-2021. As companies gradually phase their return to offices, some occupiers are reviewing their locational preferences and working models.

TECHNOLOGY AS A CATALYST TO A HYBRID WORKFORCE

With the acceleration of digitalisation, the workforce is evolving into two practices – office-based and remote working. Key sectors that belong to the latter are the information & communications, finance & insurance, and professional services. According to MTI’s advance estimates, these three sectors were the only sectors that displayed growth collectively in Q4 2020. Incidentally, the technology and non-bank financial services firms were the top office demand drivers in 2020 and accounted for at least 50% of leasing volume. Leasing demand in 2021 is expected to be led by these sectors as there is high demand for their services.

HYBRID OFFICE MODEL AS A FORM OF PORTFOLIO AGILITY

Cost efficiency was the top priority for firms in 2020. Across an array of industries, firms were either renewing or relocating, with a reduction in footprint. For the first time since 2015, islandwide net absorption was negative and tallied -0.56 mil sq. ft. in 2020. In 2021, the focus will be on portfolio agility as companies take into account of remote working in their working arrangement. Based on the recent ‘The Future of Office Survey’, more firms have indicated a shift in attitude towards having remote working as an option for the workforce. However, companies still expect employees to gradually return to the office. The survey findings show that around 66% of survey respondents intend to allow remote working for no more than one or two days per week. This is likely to steer towards a hybrid workforce in future. Nevertheless, the office still remains essential for team productivity and engagement amongst employees.

IMPLICATIONS TO REAL ESTATE

Remote working is expected to impact office demand but the physical office still remains relevant for firms to curate a social identity associated with the workspaces. In addition, the de-densifying of office space based on current safe distancing measures may cushion this impact.

RESILIENCE IN THE GRADE A OFFICE MARKET

FLIGHT TO QUALITY

The office market is a two-tier market; occupiers are showing stronger preference for prime office buildings with tech-enabled specifications vis-à-vis the ageing office stock with older specifications. In 2020, most of the negative net absorption stemmed from the Grade B market, which tallied -0.79 mil sq. ft. Some occupiers downsized while others decided to capitalise on the current downturn to take “flight to quality”. Conversely, the Grade A (Core CBD) market registered 0.51 mil sq. ft. of positive net absorption in 2020. This was largely supported by the strong take-up in 79 Robinson Road – the sole Grade A completion in 2020.

The resilience in the Grade A office market was also reflected in its vacancy rate, which kept stable y-o-y at 3.9%. This tight vacancy limited the availability of prime space for occupiers with upcoming lease expiries. Nevertheless, opportunities lay within the pool of secondary space that is emerging from the cutback in large occupiers’ footprints. Given that some of these secondary spaces are located in quality developments, there has been some positive take-up of these spaces by opportunistic tenants.

OUT WITH THE OLD, IN WITH THE NEW

The composition of office stock is gradually changing. Some developers have recognised the need to spruce their ageing office portfolio and are leveraging on the Central Business District (CBD) Incentive Scheme to rejuvenate these older assets. Several office buildings such as AXA Tower and Fuji Xerox Towers are expected to commence redevelopment in 2021. Instead, the next three years will welcome new developments with agile space solutions and digitally enabled specifications.

Over the next three years (2021 – 2023), total new supply is estimated at 3.40 mil sq. ft. This is equivalent to an annual average supply of 1.13 mil sq. ft., which is 32.2% lower than the historical 10-year annual average new supply. In 2021, there will be an introduction of 1.24 mil sq. ft. of new office stock. Of which, the only Grade A building that is slated to complete in 2021 is CapitaSpring. Overall, the construction delays have augured well for the office market as more than half of this anticipated supply in 2021 have been pre-committed.

IMPLICATIONS TO REAL ESTATE

Occupiers’ strong preference towards office buildings with efficient floor plates and well-equipped with smart technology underscores the importance for landlords to accommodate the changing demands of occupiers.

OFFICE MARKET EXPECTED TO BE ON A GROWTH PATH POST COVID-19 VACCINATION

OFFICE MARKET UNDERPINNED BY HEALTHY FUNDAMENTALS

Amid the challenging business climate, tenant retention was a key priority in 2020. Firms were downsizing and this impacted occupancy. To maintain occupancy, landlords with emerging vacancies in their portfolios began to adjust their rental expectations at a larger magnitude. This led to a full-year rental correction of 10.0% y-o-y in 2020.

Notably, this rental decline was less prominent than the moderation witnessed during the Global Financial Crisis period. To a certain extent, this correction was cushioned by the additional fiscal and job support measures provided by the government, which include rental relief and property tax rebates. In addition, the Grade A (Core CBD) office market was underpinned by a relatively tight vacancy rate of 3.9% as at end 2020.

PROSPECTS FOR RENTS TO IMPROVE IN H2 2021

2021 is envisaged to be a year of two halves. While the first half of 2021 is expected to still be under some pressure, the latter half is likely to witness some improvement. The overall office market is poised to benefit from the gradual economic recovery in 2021, as well as the gains in employment.

Arguably, the underlying strength of the office market is also attributed to the diversified occupier profile seen today. Other than the traditional sectors of banks, legal and accounting firms which may be reviewing their occupier strategies, office demand will be supported by growing sectors such as the technology, financial services and professional services sectors.

With continued demand for office space, coupled with the limited Grade A supply in the pipeline, this would support office rental growth in the second half of 2021. That said, it will not be an even, uniform recovery in rents across all office buildings. The prime office buildings are expected to benefit first, as occupiers leverage on the current downturn to ride on the “flight to quality” strategy. However, this would lead to an increasing vacancy in the older office stock, and prompt landlords to be more flexible in incentives and negotiations.

IMPLICATIONS TO REAL ESTATE

The recovery of the office market will be gradual, in line with the expected economic recovery. However, it will not be a uniform recovery across all office buildings. Landlords of buildings with emerging vacancy in the near term will need to be more flexible in rental incentives and negotiations.