Pandemic-wary workers to drive demand for Grade A space as they gradually return to offices

Citi Commercial Pte Ltd

BRIGHTER days may lie ahead for office landlords here. Commenting on the outlook for its Singapore office portfolio, which is concentrated in the Central Business District (CBD), the manager of Suntec Reit said in its third quarter 2021 update that rent recovery will continue, supported by limited new supply and demand from growth sectors such as technology, media, telecom, financial services and health-care related.

Office landlords likely cheered Singapore's easing of its current default work from home stance, by allowing 50 per cent of those who can work from home to return to the office starting from Jan 1, 2022.

But, the office property market here may increasingly be a tale of two cities. Top grade offices may thrive while poorer grade buildings struggle.

According to Colliers Research, the rental gap between Grade A and Grade B offices in the CBD has been widening in recent years. Grade B rents are around 19 per cent lower than Grade A rents in Q3 2021 compared with a gap of around 12 per cent in 2015.

Responding to queries submitted for its annual general meeting in October, GuocoLand said: "Singapore office rents, especially for Grade A offices, are poised to regain upward momentum, supported by economic recovery and steady demand from companies." The group owns assets such as Guoco Tower.

City Developments (CDL) said its flagship Grade A office building Republic Plaza continued to register positive rental reversion in Q3 2021, with a committed occupancy of nearly 95 per cent. CDL noted that demand is supported by wealth management, family office, technology and fintech companies.

CBD Grade A offices here have benefited from technology companies growing their footprint.

Recently, Amazon opened its 100,000 sq ft Singapore corporate office at Asia Square in the Marina Bay area. The new office spans 3 floors and will house up to 700 employees.

Other tech giants such as Twitter, LinkedIn and ByteDance have also been taking up CBD Grade A office space here.

Tech giants appear to be affirming the need for physical offices. In September, Google said it would spend US$2.1 billion to buy an office building on the Hudson River waterfront in New York City, United States.

Some investors are getting bullish on office towers here. Earlier this month, the sale of CBD Grade A office property One George Street to SG OGS for S$1.28 billion was completed. Last week, The Business Times reported that AM alpha is buying Robinson 112, a freehold CBD office building, for nearly S$269.7 million.

More transactions of prime office towers could materialise as monies look to find a home in safe haven Singapore, institutions chase assets in global cities and private wealth seeks recurrent income. Amid property cooling measures that kicked in earlier this month, some investors may also shift their focus from homes to office buildings.

Debate is ongoing over how prominently remote working will feature for knowledge workers going forward. Perhaps a Covid-endemic world will see many entities adopt a remote-first model that still has the physical office playing a crucial role.

Knowledge workers, who are largely working independently, can probably work almost exclusively remotely. But workers who need to interact more with colleagues and business partners or access specific equipment may find a greater need to work out of physical offices.

Some staff may find their office set-up more conducive for working than their home while others may find it more productive working from home as they save on commuting time and avoid excessive chattering with colleagues in the office.

Splitting into teams where some come in to the office on certain days may be inefficient as it adds to the administrative hassle of tracking who is in the office and who is not, weakens the intra and inter departmental collaboration, and raises questions of equity as to whether the ones in or out of the office are getting a raw deal.

Also, building a corporate culture is more challenging when staff do not get to interact formally or informally in an office setting.

But while the pandemic has probably not killed the idea of working out of physical offices, workers, who have been scarred by the pandemic, will likely demand more of their work environments. Cognisant of public health concerns, workers may demand work spaces that are spacious, clean, green and boast good air quality. They may seek to work in offices that provide some of the comforts of a home, such as having easy access to recreational spaces.

Amid a war for talent and with office rental costs being typically a relatively small component of a company's total operating costs, expect businesses to be selective in the space they want and willing to pay for the right office digs.

Thus, top quality office space be it in the CBD or other office micro markets should continue to outperform.

Unsurprisingly, major office landlords are spending to upgrade their properties.

Singapore Land Group started asset enhancement works for Singapore Land Tower early this year. There will be more green features, lush landscaped public spaces, energy-efficient lifts and lightings, a low emissivity double-glazed external curtain wall system and parking for electric hybrid cars. A grand canopy will also be created, along with a covered walkway linking visitors to Raffles Place MRT station.

CDL is redeveloping its former Fuji Xerox Towers located at Anson Road under the CBD Incentive Scheme. Subject to authorities' approval, the proposed redevelopment will comprise a 45-storey integrated project with office, retail residential and serviced apartments components.

The flight to quality theme may also see owners of strata-title buildings with large office components look for exits via en bloc sales. Such properties may not offer the specifications that many space users are looking for.

Potentially, strata-owned landmark buildings such as International Plaza in Tanjong Pagar and Golden Mile Complex along Beach Road could be sold in the en bloc market and redeveloped.

In 2022, more knowledge workers here may head back to offices, possibly not on a daily basis, but likely armed with demands for high quality spaces.

Great spaces in new office buildings and well refurbished ones could prosper. Co-working spaces with their thoughtfully curated and flexible offerings may thrive too.

Owners of upcoming new Grade A office buildings such as IOI Central Boulevard Towers in Marina Bay and Guoco Midtown in Beach Road can probably look confidently towards signing up tenants and recouping the billions that have been invested in these projects.

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