Eschewing traditional office space

Businesses that choose high-tech space or business parks may be rewarded in the longer horizon.

Sat, Oct 23, 2010
The Business Times

By Ong Kah Seng

LAST year and 2010 have been encouraging for Singapore's industrial property sector. Although the sector was fairly quiet compared to the residential and commercial sectors, rents and capital values of industrial properties were on a humble uptrend, reflective of a gradual and possibly sustainable recovery.

However, it was a period of contrast between traditional production space and trendy industrial space. As at end-H1 2010, rents of conventional factories in most locations improved by about 5 per cent year on year whereas rents of high-tech space and business parks are still some 10 per cent lower.

Indeed, even when the stellar economic recovery in H1 2010 did little to boost rental recovery, one wonders how the high-tech industrial and business park segment may perform in the near future, given that the economic recovery is set to slow.

What went wrong?

To understand the predicament of high-tech space and business parks, one must examine the fundamental cause, which is predominantly demand or supply-led. On top of the weakened demand during the economic recession year 2009, the sluggish rents for high-tech space and business parks were underpinned by an outright excess supply with off-the-tangent market timing.

When net new demand contracted in the economic recession year 2009, the excessive supply exacerbated the fall of occupancy at business parks, from 93.3 per cent in 2008 to 80.8 per cent in 2009. Last year, there was a total of 1.77 million square feet of net new supply of business parks, the highest annual figure since the information was available from the Urban Redevelopment Authority from H2 2002.

The story did not stop in 2009 - 1.55 million sq ft of high-tech/business park space was completed in H1 2010, including Mapletree Business City which offers three business space towers. Occupancy fell by 5.9 percentage points in H1 2010 to 74.9 per cent.

The excessive supply of high-tech space and business parks highlighted the penalty from a mismatch in property development activity with the economic cycle. The development mismatch for high-tech space and business parks stemmed from the office property market, where hardly any office space provider adopted a contrarian strategy by developing office projects from the Sars-stricken year 2003, though development costs were attractive - leading to an office space crunch as the economy recovered and heightened in 2007.

The race for office space in 2006 and 2007 led many eligible businesses to desperately rely on high-tech space or business parks. That prompted various high-tech and business park development activities, where the potential supply of business parks rose dramatically in 2007 to 6.02 million sq ft, the largest in the past five years.

As these projects were planned during the economic boom in 2007, the projected demand dissipated when the projects were eventually completed from 2009. Several projects which enjoyed pre-commitments achieved this at the expense of older buildings, as some tenants relocated to newer, better premises for an enhanced operational experience.

With landlords expected to be pressed to lease out substantial available high-tech space, rents of high-tech and business parks will be relatively stagnant in the next two years.

Challenging times ahead

Meanwhile, although the pace of corporate expansion has been encouraging, it has been limited to new core business unit set-ups as opposed to total business expansion involving both new strategic initiatives and extensive supporting business units. Many current new business initiatives are experimental and more supporting functions and backroom operations can only be validated after the initiatives are tested viable after a while.

While companies are keen to expand to exploit the opportunities arising from early economic recovery, there are many that remain sensitive to wider risks, particularly a possible double dip in the US economy, and prefer to keep business expansions incremental.

It is, however, a competitive rental prospect where high-tech space and business parks can emerge as low-cost business space solutions. Perhaps, some tenants can safely read that rents of high-tech space and business parks can be renewed at reasonable levels, as landlords lose the upper hand of limited supply.

High-tech space and business parks may suit businesses with long-term occupation perspectives and a preference for rental stability.

Judging from the last cycle, that is, the peak in mid-2008 and the trough at end-2005, high-tech rents fluctuated at a maximum of $2 per square foot. However, suburban office rents increased, for example, from $2.90 psf in the trough at end-2004 to $7.90 psf at the peak in mid-2008. Although the upcoming rise in office rents is likely to be subdued compared to the last upswing in 2007, it will always be more responsive than that of high-tech space and business parks.

The past 20 years have been significant for the Singapore property market, which underwent several pronounced cycles.

Occupiers increasingly appreciate options that provide predictability in occupancy costs as the benefits go beyond rental savings. There are increasing businesses seeking professional property advice on a fair upfront pre-payment for long leases of at least 10 years, reflecting the growing desire to be screened from rental irregularities. A regular rental platform frees businesses from frequent property concerns.

Qualifying businesses which relinquished the current choice of office space for high-tech space or business parks may be rewarded in the longer horizon, as they will not have to allocate additional resources to review accommodation concerns.

Instead, they can channel resources into developing core business strategies and concentrate on capturing market share when the economy ultimately recovers.

The writer is senior manager at Cushman & Wakefield Research

This article was first published in The Business Times.