June 10, 2009 Wednesday

Rent my office: Cash perks thrown in

Landlords resorting to 'golden hellos' to draw tenants in quiet market

By Joyce Teo

COMPETITION for tenants is so intense in the quiet office sector that landlords are resorting to offering cash or capital contributions to attract new business.

Also known as capital expenditure, or capex subsidies, these 'golden hellos' are said to range from half a million dollars to a couple of million dollars and are often used for the fitting out of offices, according to consultants.

A few deals in the works involve one-off lump-sum cash incentives - largely unheard of here - although most landlords prefer to spread the capital contributions over the lease period.

'It shows that there's a certain amount of pressure in terms of occupancy. This hasn't been done since 2003,' said Jones Lang LaSalle's head of markets, Singapore, Mr Chris Archibold.

'The biggest problem today is the lack of cash outlay to fund the fit-out process in a relocation,' said Cushman & Wakefield managing director Donald Han.

Mr Han was recently involved in a 20,000 sq ft anchor tenant lease where the landlord agreed to a fit-out loan to be paid back over the period of the lease.

Fit-out costs can range from about $35 per sq ft (psf) to more than $100 psf.

Capital contributions seem to be more the exception than the rule, with landlords of mostly new space offering them, and then only to certain tenants.

'The tenants have to be big enough to anchor a building. It's got to be a good size to get a leasing campaign started,' said Mr Archibold.

'These would be Fortune 500 companies, a recognisable brand name.'

Five to six deals involving capital contributions are being negotiated, he said.

CBRE executive director (office services) Moray Armstrong said there had been a few deals with capital contributions during past downturns.

And, in this cycle, it is possible that capital contributions - a common practice in the United States - may be more widespread and some of the funds might be at the forefront of this, he said.

Landlords of new developments have it tougher, given that they have to offer more than just competitive rents to attract tenants who may prefer to stay put.

About 2.5 million sq ft of space will come to the market this year alone, up from 1.4 million sq ft last year.

Straits Trading Company is offering capex subsidies for its Straits Trading Building that will be ready in November and is now one-third pre-committed.

Another new building, Mapletree Anson, is close to securing 35 per cent in pre-committed leases.

A Mapletree spokesman said this was 'an encouraging take-up rate, given current market conditions, as we understand that new buildings and developments in the vicinity have not secured any pre-commitments to date'.

Indeed, there have been no major leasing deals over the past nine months, against three to four major deals per year during the recent boom, said Jones Lang LaSalle.

But office inquiries have risen recently as landlords are now more competitive, said Mr Douglas Dunkerley of Corporate Locations.

Office rents plunged in the first quarter by up to nearly 30 per cent for Grade A Raffles Place space. Jones Lang LaSalle's first quarter rent is at $10.75 psf.

Office rents are expected to fall less sharply from now on, with consultants estimating single-digit second-quarter fall for Grade A Raffles Place space.

Nevertheless, with companies putting expansion on hold, demand for office space is still weak. By next year, office vacancy levels are expected to rise to the low teens - a level seen in previous slumps, consultants said.

'The MNCs that we've talked to recently have seen demand levels for their products fall to something that looks like 2003 to 2005 levels,' said Singapore International Chamber of Commerce chief executive Phillip Overmyer.

'Yet cost levels - office rentals, operating costs - have only decreased slightly from record levels in 2008.'

Mr Overmyer said he feared this might mean some of the larger companies moving out of Singapore to cheaper locations.

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