Can newer business parks be viable when older ones are grappling with rising vacancies?

One concern is whether new space in the pipeline can be absorbed, given a coming spike in supply and a widening lag in take-up

Jul 1, 2024

Vacant spaces, dusty “for rent” signs and a distinct lack of human traffic – hardly a good look for real estate marketed as a modern business campus. Yet the reality facing Singapore’s older business parks seems grim, raising concerns over planning for and viability of even newer properties.

One concern is whether new space in the pipeline can be absorbed, given a coming spike in supply and a widening lag in take-up. Another question arising is whether better uses can be found for ageing, half-empty buildings if industries that had previously supported occupancy are not growing.

Overall vacancy across business parks hit 22 per cent as at end-March this year, indicated latest JTC figures. Vacancy has crept up from 18.7 per cent in the year-ago period, and 14.4 per cent in Q1 2022.

Older properties in the outer regions of the island – including Changi Business Park (CBP) in the east and International Business Park (IBP) in Jurong – are markedly worse off.

“Suburban business park vacancy is about 34.4 per cent in Q1,” said Wong Xian Yang, Cushman & Wakefield’s (C&W) head of research for Singapore and South-east Asia. In contrast, “overall city fringe business parks enjoy significantly lower vacancy rates of about 6.8 per cent”, he added.

Occupancy at CBP, which opened in 1997, has been trending down since end-2017, said Lee Sze Teck, Huttons Asia’s senior director of data analytics. At Q1 2024, the occupancy rate stood at 69.6 per cent, 21.6 percentage points lower than its peak in 2017, noted Lee.

High-profile technology companies and banks that had housed hubs in the estate have exited, after cost cuts and major lay-offs in recent years.

“Both banking and technology sectors, historically the backbone of high-quality business parks like CBP, are currently not in an expansionary phase,” said Tricia Song, CBRE’s head of research for Singapore and South-east Asia.

Many IT companies operating at CBP moved to less costly locations outside Singapore, Lee added. Tightened criteria for foreigners’ employment passes pulled up hiring costs for software engineers.

Structural and cyclical challenges

“The challenges facing CBP are both structural and cyclical. The offshoring trend is a structural change affecting the technology industry, thus there may be a need to reconsider the positioning of CBP,” he said.

International Business Park, which opened earlier – in 1988 – as part of a new “innovation district” in Jurong, is now seeing even higher vacancy than CBP. Some buildings in the “advanced manufacturing hub” are down to 40-something per cent occupancy, even as tech-heavy manufacturer Hyundai moved in with its new electric vehicle assembly plant.

CapitaLand Ascendas Reit (Clar), which a recent UOB Kay Hian report pinned as having the largest exposure to local business parks among Singapore Reits, is not sitting on its hands.

Clar holds 28 business park assets in Singapore – five properties in IBP and seven properties in CBP, valued at S$413 million and S$1.4 billion respectively. These account for 10.3 per cent of its portfolio valuation. In total, business parks account for 21.4 per cent of its valuation, said UOB Kay Hian.

Its IBP properties in Jurong showed 57.4 per cent occupancy as at December 2023, while the Changi buildings “also have below-par occupancy of 76.1 per cent”, the Jun 25 report said.

The real estate investment trust (Reit) started redevelopment work on one of its IBP assets – 27 IBP – in 2020, after occupancy fell to a low of 29.9 per cent in 2019. It is expected to be completed by Q1 2026, and will add 50 per cent more gross floor area to the building.

Clar is also said to be in negotiations with prospective tenants to backfill vacant space at CBP and IBP.

Prospects may be dimming

While the diminishing appeal of older properties can be put down to age and location, prospects for business parks as a whole may be dimming.

“Business park properties, being pseudo-offices, have been the most disrupted by work-from-home (WFH) and hybrid work arrangements,” wrote UOB Kay Hian analyst Jonathan Koh.

Mapletree Industrial Trust holds three business park properties at IBP and CBP valued at S$533 million in total as at March 2024, accounting for 6.1 per cent of portfolio valuation. Occupancy “is in line with the broader market at 80.9 per cent”, wrote Koh, and the Reit is mulling divesting its business park assets.

Current leasing activity in business parks is focused on retaining tenants as occupiers turn cautious, said CBRE’s Song. Rental growth in the short term is expected to be muted.

Supply is piling up. Data from Colliers showed that islandwide average annual net supply for the last 10 years (2014 to 2023) was 0.98 million square feet, some 30 per cent more than net absorption at 0.67 million sq ft.

CBRE estimated that there is about 3.17 million sq ft of new business park supply coming from Q2 2024 to 2027. Average annual new supply over 2024 to 2027 is some 16 per cent higher than the five-year historical average during the 2019 to 2023 period.

Older properties are losing out because they did not manage to attract new tenants fast enough while newer and better business parks are being built, said Alan Cheong, Savills Singapore’s executive director for research and consultancy.

Newer estates in locations such as one-north, Alexandra and Labrador offer better accessibility. The sprawling Science Park campus in Buona Vista, for instance, is in the process of renewal, with Clar leading a major redevelopment in a cluster called Geneo targetted at the cutting edge life-sciences sector.

As Cheong pointed out, the average period for a major tech cycle runs about 10 years, but the economic life cycle of a building is about 30 to 40 years.

“Because of this mismatch, and the constant promotion of newer digital districts, the problem for the older and even the latest business parks gets compounded,” he said.

Newly completed projects are also “throwing in incentives such as fit-out capex and/or longer rent-free periods to entice tenants to relocate”, said Catherine He, head of research for Colliers Singapore.

Dishing out the deals

Indeed, landlords such as CapitaLand are dishing out “three-for-two” deals offering three years rent for the price of two, at some of its buildings in Science Park.

The pullback by tech giants has also extended to newer buildings. In February this year, Google gave up about 344,000 sq ft of space at Fraser Logistics and Commercial Trust’s Alexandra Technopark, representing about one-third of the property’s total net lettable area.

Meanwhile, a massive new business campus is being built in the north-east. Part of the government’s decentralisation push to draw activity outside the Central Business District, Punggol Digital District (PDD) is pitched at companies in what are seen as new high-growth areas.

PDD will contribute more than two million sq ft of business park space, of which 1.3 million sq ft will materialise in 2024. Of this, two-thirds of the space has been pre-committed to tenants in cybersecurity, artificial intelligence, robotics, fintech, government entities and a bank. PDD will also house the new campus of the Singapore Institute of Technology, as well as a mall and a hotel.

Asking rents at PDD average around S$5 per square foot (psf) per month, said Colliers’ He. These rates position PDD higher than suburban business parks asking S$3.64 psf per month. City fringe business parks command slightly over S$6 psf per month, while city fringe office space goes for just under S$8 psf per month, said C&W.

A solution in sight?

Could a solution lie in repurposing older business parks or rezoning land reserved for business park use?

In June, the Urban Redevelopment Authority approved the change of land use for some plots in the one-north area, previously zoned for business parks, to “residential with commercial at first storey” use. These sites will be put up for tender under the government land sales programme.

Asked if more business park-zoned land could be similarly repurposed, JTC told The Business Times that changes are made to land use plans to address the needs of the various sectors as well as to support changing social demands and business conditions.

“For one-north, it has been planned as a mixed-use estate since its inception. Therefore, the recent rezoning of business park land to residential use was not due to a lack of business park demand in one-north, but to bring workplaces in one-north closer to homes and further enhance one-north as a vibrant mixed-use business park,” said JTC.

“For Changi Business Park, JTC will continue to work with URA to review its master plan to ensure it remains relevant in meeting the needs of our industrialists,” the agency said.

While 2024 will see a spike in new space, supply is expected to fall off sharply thereafter, said Savills’ Cheong.

“It is not a situation from oversupply coming from future projects, but a question of what will happen to the buildings from the first generation of business parks here.

“In 10 years’ time, what is presently the top-of-the-line business park may find it challenging to maintain its status as the premier campus to locate in,” he said. “Gentrification doesn’t seem to be a word in the business park space.”

https://www.businesstimes.com.sg/pro...sing-vacancies