To let: 400,000 sq ft shadow office space

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Published June 11, 2009

To let: 400,000 sq ft shadow office space

Financial institutions in search of tenants for space that they pre-committed to

By UMA SHANKARI


CLOSE to 400,000 square feet of shadow office space is now available as financial institutions scramble to find replacement tenants for the space that they pre-committed to in the boom years.

A white paper on the subject by Colliers International says that the amount of shadow office space in Singapore rose by a steep 48 per cent over the last two months to hit 370,000 sq ft in May 2009 - up from 250,000 sq ft in March.

This is equivalent to 0.5 per cent of the islandwide office stock, or about the size of MAS Building at Shenton Way.

Likewise, Jones Lang LaSalle (JLL) estimates that some 400,000 sq ft of shadow office space is now available. The bulk of this came onstream from February to May this year, said JLL's regional director and head of markets, Chris Archibold.

Shadow space is loosely defined as excess office space that companies have leased but are looking to sublet to a third party for reasons such as reduction in headcount.

Colliers' white paper, which was released yesterday, identified the financial industry as the largest contributor of shadow space. It accounts for 46 per cent of all shadow space currently being marketed.

'This is hardly surprising,' said Colliers. After all, the financial services sector experienced explosive growth of 11.7 per cent in 2006 and 15.7 per cent in 2007. During this period, many financial institutions - including Citigroup, Credit Suisse, Deutsche Bank, Merrill Lynch, Prudential Assurance and UBS - embarked on aggressive expansion plans.

'With the current economic downturn being fuelled by the collapse of the global financial markets, the reverse is now true,' Colliers observed.

The white paper also gave a breakdown of where the available shadow space is located.

Of the 370,000 sq ft of shadow space available as at May 2009, some 42 per cent is located in the Raffles Place/New Downtown micro-market.

A further 24 per cent is located in the Marina/City Hall area, while the Shenton Way/Tanjong Pagar micro-market accounted for some 14 per cent.

Even more shadow space is likely to become available over the rest of the year and in 2010, analysts said.

Colliers projects that some 400,000 to 600,000 sq ft of additional shadow space could become available by 2010 from just financial institutions.

The problem will be worsened when construction of new major office buildings, in which financial companies have pre-committed to large amount of spaces, is expected to be completed.

'This will add to the downward pressure on rents exerted by the potential supply of 9.6 million sq ft from Q1 2009 to Q4 2012, and could keep rents depressed for a prolonged period of time and delay market recovery until after 2010,' said Colliers.

It projects that Grade A office rents will decline by up to 60 per cent in 2009 and 20 per cent in 2010.

JLL's Mr Archibold, who similarly estimates that another 400,000 sq ft of shadow office space could be added up to 2010, also expects rents to take a hit from the increase in shadow space.

Colliers' data shows that as at March 2009, grade A office rents in the Raffles Place area have plummeted by some 41 per cent since peaking in Q3 2008.

The intense race for tenants has even resulted in landlords offering incentives such as rent holidays in addition to closing rents that are sometimes 25-30 per cent below asking rents in order to retain or secure new tenants, the firm observed.

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June 11, 2009 Thursday

Idle office space casts shadow on rents

Tenants who cut losses by subletting are affecting rates

By Joyce Teo, Property Correspondent


SOMEWHERE in the Central Business District lies a skyscraper with floors of idle office space on offer, and it is not even officially on the rental market.

This is called 'shadow space' - office space that technically has been leased out to a tenant, except that that tenant now wants to sublet it to someone else because he has too much of it.

More and more companies, particularly financial institutions, are looking to sublet 'shadow space', according to a new Colliers International study.

Many have shelved expansion plans or scaled down operations in light of the current economic crisis, and do not want to keep paying rent for space that they no longer need.

Colliers estimated that 'shadow space' rose another 48 per cent from an estimated 250,000 sq ft in March to 370,000 sq ft last month. That is equivalent to the size of the 30-storey MAS Building in Shenton Way.

While it may represent only 0.5 per cent of Singapore's islandwide office stock, it is about 15 per cent of the 2.5 million sq ft of new office space expected to come onstream this year.

And the number is still growing.

This unexpected overhang of excess space could delay an anticipated recovery in office rents, said Colliers.

Some 42 per cent of the space is in the Raffles Place and Marina Bay area, with 24 per cent in the Marina and City Hall area and the remainder in the Shenton Way and Tanjong Pagar areas.

Nearly half of all the 'shadow space' currently being marketed is offered by financial institutions, which went through an explosive growth period earlier but were among the first to downsize their operations in the downturn. Citibank is among those with idle space - at buildings such as Millenia Tower, Centennial Tower and Capital Square.

The information technology and marine/offshore industries are the next two largest contributors of 'shadow space'. So far, the fast-growing 'shadow space' in the market has added to the competition for tenants and exacerbated downward pressure on rents.

'Corporates are looking at offloading such space as soon as possible so they need to be more attractive rental-wise,' said Cushman and Wakefield managing director Donald Han. Rents for 'shadow space' can be as much as 20 per cent lower than the committed rental deals for usual office space, he noted.

That is because there are typically more restrictions associated with 'shadow space', even though the pros include a fitted-out space. For example, the remaining lease of such space may be two years, shorter than the typical three-year lease.

'The tenant's agenda is to mitigate their loss by subletting the idle space,' said Knight Frank director of business space (office) Agnes Tay. 'Depending on how much they are willing to cut their losses and when they signed the lease, the discounts can be as low as 10 per cent or as high as 50 per cent,' she added.

As a result, traditional landlords are offering incentives such as rent holidays on top of very competitive closing rents, sometimes 25 per cent to 30 per cent below what they asked for, said Colliers.

Going forward, financial institutions who had pre-committed to large amounts of space in yet-to-be completed offices or business park buildings in the past two years may no longer need so much room.

As the bulk of these buildings - including Marina Bay Financial Centre Phase 1 - will be completed next year, the amount of 'shadow space' could peak then, said Colliers.

And should the global business environment remained challenged, these financial institutions alone will make available an estimated 400,000 to 600,000 sq ft of additional 'shadow space', it said.

The office rental market is already trying to digest a potential supply of 9.6 million sq ft of office space available from this year till 2012.

Grade A office rents are projected to decline by up to 60 per cent this year and 20 per cent next year.

By the end of next year, the average monthly gross rents of Grade A office space in the Raffles Place micro-market could return to the mid-2005 level of just $5 per sq ft (psf) per month, from $10 psf in the first quarter, said Ms Tay Huey Ying, Colliers' director of research and advisory. This, though, would still be above the $3.95 psf seen at the bottom of the market in 2004.

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