'New' office leases make up only 10 per cent of the total this year: Cushman

PHOTO: The Business Times

Singapore - AS YET another sign of tough times facing businesses, new office leases this year - by companies that previously did not have a presence here or were not in the building where the new lease is inked - made up only 10 per cent of all office leases inked this year, down from 20 per cent in 2015.

Relocation leases accounted for a significant 63 per cent of the leases, while the balance 27 per cent are renewal leases, based on Cushman & Wakefield's lease profile analysis.

Its research director Christine Li noted that the stark drop in new leases this year coincided with a cautious business mood as the economy battles headwinds in the banking, oil, and commodities sectors.

Savills Singapore research head Alan Cheong flagged that the technology sector, while still growing rapidly, is unable to make up for the shrinking of office space by troubled sectors. "With a glacial pace of growth anticipated for 2016-2017, net new demand in the near term will be weak," he said.

Read also: Prime office rents: No reprieve in sight for 2017

Going by the lease profile this year, signs of growth tapering off in the technology sector have emerged.

Technology companies' share of the office leases inked this year dived to 14 per cent from 33 per cent last year as fewer large-scale tech companies were expanding; the share of finance companies slipped to 24 per cent this year from 36 per cent, while the share of professional/business services firms surged to 17 per cent from 5 per cent as many of these firms are relocating to new office buildings.

Another area of concern is that more than half of the new leases this year were supported by serviced office and co-working players, particularly in the new office developments, Ms Li noted.

These included Regus' taking up of 12,940 square feet of space in DUO Tower, 20,000 sq ft in Guoco Tower, and 25,000 sq ft at 410 North Bridge Road (Cosmic Insurance Building). JustGroup is occupying some 40,000 sq ft at the former UIC Building for serviced offices and 34,000 sq ft at Marina One for co-working space. The Working Capitol said this month that it is taking up about 55,000 sq ft across 11 floors at 140 Robinson Road - this deal is not included in the Cushman & Wakefield study.

Photo: UGRPH

CBRE executive director for office services Michael Tay noted that the full potential of co-working space remains unclear but "with everyone jumping into it, there is always be a concern that there will be a consolidation at some point".

Noting that the qualities of co-working operators are varied, ranging from some providing a holistic startup community and support services to those that only sell membership for the use of space, Mr Tay said he expects to see mid to long-term consolidation in this sector. The TMT (technology, media and telecommunications) sector may also be primed for some short-term consolidation.

But with quality office space commanding a smaller rental premium this year than before, many office occupiers were prompted to capitalise on a soft rental market to move to better buildings in a "flight-to-quality".

Some 77 per cent of the relocating tenants signed leases with higher rents on a per square foot (psf) basis, while some 21 per cent of these tenants signed leases with lower rents. About 2 per cent of the tenants signed leases at the same rents as before.

Cushman & Wakefield estimates that a majority of relocating tenants had in 2015 inked leases with rents that were up to S$5.50 psf per month higher than what they were paying before; for the leases signed this year, most relocating tenants have to pay only up to S$2 psf per month more at the new premises.

Ms Li noted that such rental premium would have ranged from S$3-4 psf per month - usually for the movement from Grade-B or C buildings to Grade A-plus buildings - in a landlord's market.

DBS vice-president for group equity research Derek Tan felt that some tenants may be upgrading to a better location as their renovation costs and fit-outs in existing premises are fully depreciated. They may also be motivated to do so in a bid to attract talent as the millennial workers seem to prefer prestigious office addresses and funky office spaces.

Possibly due to softening rents and an anticipation of rents bottoming out in the future, most office tenants are taking up more space as they signed relocation leases.

Among such leases, some 79 per cent showed an expansion of space requirements, while 13 per cent involved space contraction; the remaining 8 per cent opted for the same amount of space in the new location they are moving into.

Consequently, there was a net increase of 205,000 sq ft of space requirement among tenants that occupy at least 5,000 sq ft, according to Cushman & Wakefield. On average, such tenants took up 8,200 sq ft more space when they signed relocation leases this year, compared to those that took up 6,300 sq ft more space on average last year.

Explaining why a majority of relocating tenants are expanding their spaces, Knight Frank head of office Calvin Yeo said many relocate because they need more space in anticipation of future business activities but are unable to find that additional space in their existing buildings.

Still, with many of them moving into buildings with larger floor plates and higher efficiency, the increase in space requirements would be lower than if they had remained in their existing buildings, he added.


This article was first published on Dec 23, 2016.
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