Office spaces outside CBD 'need to work harder'

They need competitive edge as rental gap between central area and beyond narrows, say market watchers

Sep 19, 2017

Lee Meixian

THE rental gap between Grade A central business district (CBD) office space and those outside the district is the smallest that it has been in a decade. With CBD rentals having plummeted more than 20 per cent since the start of 2015 according to CBRE's index, city-fringe and suburban offices are finding themselves having to differentiate on building design and amenities to attract tenants.

CBRE data shows that the rental gap between the two regions has gradually narrowed from 64 per cent in Q1 2015 to 54 per cent in Q2 2017. CBD Grade A office rents averaged about S$8.95 per square foot (psf) in the second quarter.

Historically, the largest rental gap, at 114 per cent, occurred in Q3 2008 amid the brewing global financial crisis - a time when CBD office rents were averaging a jaw-dropping S$17-18 psf.

Michael Tay, executive director of office services on CBRE's advisory and transactions team, said that office rents have been trending downwards since early 2015, and started stabilising only in Q2 this year.

From Q1 2015 to Q2 2017, Grade A Core CBD rents declined 21.5 per cent, while rents in decentralised locations fell 14.7 per cent over the same period.

The way that the cycle moves seems to be that in an office market up cycle, the rental gap between the two regions will diverge; and in a down cycle, they converge.

This is because Grade A core CBD rents tend to lead and outperform the rest of the market in bullish times. Conversely, rents in decentralised locations offer more stability through the cycles, with less profound movements in rents through good and bad times.

CBRE expects office rents to bottom out and increase about 7 per cent in 2018. Some in the market believe that when that happens, a widening rental disparity will cause CBD tenants to consider moving out into the city-fringe to save on costs.

Mr Tay begs to differ, however, saying that the current tight labour market has made it more competitive for companies to attract and retain talent; and that employees still tend to like to work in the city.

"If you look at the last two to three years, Google was the only notable one that relocated out of the CBD into a decentralised location (Mapletree Business City)."

Others such as Grab and Uber are moving into the city. Grab is reportedly vacating its Sin Ming premises to take 100,000 sq ft in Marina One; Uber has shifted into Guoco Tower in Tanjong Pagar.

Within the city, there are also movements - Facebook will be vacating its premises at South Beach Tower to move to Marina One; Microsoft is going to Frasers Tower upon its completion in mid-2018 from its current location at One Marina Boulevard.

How then can decentralised office building owners compete for the occupiers' pie in this tenants' market?

Mr Tay said: "The decentralised office and business park locations that do really well are the ones that have a combination of good quality space and amenities that create a precinct.

"Hence, they are attractive to occupiers that want to go slightly outside the CBD to enjoy rental savings, but at the same time do not want to risk upsetting the dynamics of its human resource."

He added: "Talent attraction and retention is a big thing now in Singapore . . . While many companies are concerned about real estate costs, they are also mindful of the impact on human resource if they make a wrong location decision."

For instance, at Paya Lebar Quarter, the developer Lendlease is currently in talks with six to seven potential multinational corporation tenants, some of whom are financial companies, including high-growth financial technology players.

Richard Paine, managing director of Paya Lebar Quarter, feels that suitable tenants for the development would include "companies that may be in the CBD at the moment but are growing rapidly, and that growth cannot be accommodated in the CBD".

He added that he has noticed a global trend of financial institutions opting for a city-fringe location, rather than splitting their front and back offices into the core CBD and suburbs respectively.

All three towers of its office development, offering about 880,000 sq ft in floor area, will be completed in the second half of 2018 (see amendment note).

Mr Paine said Lendlease is positioning the development as a progressive office project designed with the health and wellness of its occupants in mind.

Besides its biophilic design (the incorporation of nature into the built environment), it also has facilities such as showers and bicycle parking to encourage healthy lifestyles. There will also be Wi-Fi-enabled public and break-out spaces for those who prefer to work outside their office cubicles.

"That's the proposition we offer against the CBD, which is a more stressful environment where commuters have to fight for space on trains or in traffic when they come to work . . . Not everyone wants to be in the city because there are a lot of negatives to being in the city," he said.

The connectivity that technology affords has also helped to negate the need for companies such as law firms and professional service providers to be located within the CBD in order to be near their clients, he added.

Still, Cushman & Wakefield research director Christine Li believes that the CBD, originally fashioned as Singapore's business and financial hub, will continue to remain so.

Decentralised offices will not be poaching long-time CBD tenants anytime soon. Rather, their appeal would lie in housing designated clusters for related companies within a certain industry, or in catering to companies that want to co-locate in a more campus-like environment.

She said the Jurong area may in time emerge as an example of a "knowledge-based campus" which integrates high-specification facilities with amenities and communal spaces conducive for innovation.

As for technology companies, she believes that there is currently no cost pressure to draw them to decentralised locations because the CBD still has a branding effect, and their talent pool comprises mostly young millennials who still prefer to work in the city centre.

"For the mid-sized tech firms such as Grab, Carousell, Airbnb and LinkedIn, they have not reached a critical mass where they need to have their own buildings like the established technology companies," she said. All these companies are currently still located in the CBD.