Office demand in a post-pandemic world

From the answers, there are three takeaways that help summarise the markets at the moment:

1. In almost every city, incentives are very likely to increase over the next six months. Shanghai is the only exception where incentives are expected to remain the same, having already significantly increased in recent quarters.

2. The proportion of landlords willing to offer more flexible lease terms varies. In London and San Francisco, more than 80% of landlords are willing to, compared with less than 40% in Shanghai.

3. Looking forward, seven out of 10 cities expect more landlords to offer flexible lease terms. Only Hong Kong and Shanghai expect the proportion of landlords offering these terms to stay the same.

LONDON

The central London office market is currently firmly in “wait and see” mode, as occupiers and investors try and calibrate their thinking around the two unprecedented events that are Covid-19 and Brexit.

Generally, the market is responding in a typical recessionary fashion, with low levels of take-up, rising vacancies due to subletting, and development starts being delayed. There is no evidence of any falls in prime headline rents to date, though there is downward pressure on net-effective rents.

Looking ahead, we expect that pre-letting activity will remain robust as the level of requirements in the London office market has risen during lockdown. This will combine with fewer development completions to maintain or even put upward pressure on rents from 2021.

Investor demand for core London office product has strengthened since the summer lull, and we are seeing robust competition between risk-averse domestic and international buyers for core assets.

NEW YORK

Prior to the development of a vaccine or treatment, the Manhattan office market is facing significant dislocation caused by ongoing business and economic fallout from Covid-19.

With more than 16.1 million sq ft of sublease space currently available, market availability increased to 13.3% in the third quarter – its highest since the Great Recession.

Leasing demand has been tepid at best and remains down 45% compared with last year. Still, a handful of large leases – notably from the tech sector – revived volume somewhat in Q3. Facebook signed a new 730,000 sq ft lease at Vornado’s Farley redevelopment in August, securing its space there at about a 9% discount given current circumstances.

Some tenants began to repopulate offices in July (+/- 10%), yet for many businesses the current work-from-anywhere (WFA) timeline remains indefinite. The trend towards flexibility is accelerating as occupiers reduced their lease term commitment by 5-10% from pre-pandemic levels in order to evaluate overall demand for space due to permanent layoffs and longer-term shifts to part-time WFA.

Owners have been increasingly flexible in terms and generous in concession offerings to secure tenants in this uncertain environment. Speculative construction is likely to be limited in the face of a softening market. Still, trophy assets will benefit from a flight-to-quality as organisations transition the use of office space from “performing work” to centralised collaborative meeting places for culture and innovation. Availability is likely to remain elevated into 2021 and rents are expected to see further declines before bottoming out. The timing and depth of the bottom in Manhattan ultimately depends on macro-economic conditions, the recovery of office-using employment, and long-term policies on agile/WFA policies.

HONGKONG

The city’s Grade A office vacancy rate rose to 6.8% at the end of September 2020, from 4.7% at the end of 2019. The surging vacancy rate during the period was attributed mainly to worldwide economic recession, which has inevitably resulted in corporate downsizing and the surrender of office space.

Decentralisation continues to prevail with more Central-based financial and business services firms moving to other districts (e.g. Wan Chai/Causeway and One Island East). Most businesses have resumed normal working patterns but some multinationals are still allowing staff to work from home.

Retail and hospitality have been greatly impacted by the pandemic, together with finance and business services. This is reflected in the rising vacancy rate in the CBD.

Medical and online businesses are examples of sectors that have been relatively less affected. In order to attract tenants, landlords are currently offering longer rent-free periods as an incentive, rather than shortening the lease term to less than the typical term of three years.

Developers and investors are more cautious when considering land acquisitions, and the Development Bureau recently delayed the tender of New Central Harbourfront Commercial Site 3.

We expect rents to fall by a further 7.5-10% in a year’s time, after rents have fallen by 11.9% over the first three quarters of 2020. The vacancy rate is expected to continue rising given sluggish leasing activity and 1.4 million sq ft of new supply due to complete in 2021.

SHANGHAI

Most companies are 100% back to work by now and many of them have been since local transmission of Covid-19 has been largely eliminated aside from small localised clusters in May. There may have been some variation in work resumption based upon ownership, management or industry initially, but all firms should be back by now.

Landlords are looking to increase value offering to tenants in all sorts of ways. Leases are already relatively short, so it is hard to shorten leases further, but there may be flexibility in the lease conditions including first right of refusals.

Some landlords may also provide temporary workstations to tenants for overflow space and they are also upgrading property management offering and investing in PropTech solutions, for example touchless lifts and facial recognition security gates.

Most developments are speculative ventures. Some projects have been delayed due to construction delays, financing, or market conditions, and pre-leasing periods have been extended to 12-15 months. Both occupancy and rental rates are likely to be lower in 12 months’ time, though this is as a result of supply pipeline versus any particular weakness in demand.

HANOI

By the end of Q1/2021, the office market has seen positive signals of recovery. In Hanoi, from Q4/2020 to Q1/2021, new project launches of prime office space were Capital Place, Thaiholdings Tower and Leadvisors Towers. It is forecast by 2023, Hanoi will have more Grade A projects concentrating in Ba Dinh District situated in Mid-town area and Cau Giay District located in the West, the average rental of Grade A office in Hanoi is expected to increase up to 35 – 37 USD/sqm/month.

Grade A office rents in Ha Noi depend more on future supply than the current effects of COVID-19. In Ha Noi, between Q4.2020 and Q1.2021, Capital Place entered 93,000 sqm, Thaiholdings Tower 23,000 sqm and Leadvisors Tower launched 18,000 sqm. These large new entries is why Grade A office rents in Ha Noi remained stable between Q3.2020 to Q1.2021, despite Grade A average occupancy staying above 80 percent.

HO CHI MINH CITY

In HCMC, new office supply continues its shift outside the CBD. In the upcoming 3 years (2021-2023), HCMC will not have any new supply of Grade A offices in CBD. However, new areas of Grade A offices will be clearly formed outside the CBD, similarly to Hanoi market.

Office supply in both CBDs offers budget-friendly and more restrained rental options. Demand from small businesses will continue rising. There is a much greater focus on human resource management, with Generation Z making up 32% of the population. There is also growing interest in creating a better work-life balance to support increased productivity, and in providing office solutions that align with longer-term recruiting strategies.

Ho Chi Minh City office market has stable performance, its growing trends in supply outside the CBD, increases in CBD office rentals, and decreases in vacancies. Notable projects there include Office Haus, OneHub Saigon, and Cobi Tower 1 & 2. On the prospect level, tenants in Ha Noi and Ho Chi Minh City still have a great variety of leasing options in many different projects.

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