SINGAPORE (EDGEPROP) - Corporations in Asia Pacific are re-examining their commercial real estate strategies amid mass government-imposed lockdowns, as well as work-from-home arrangements that have resulted from steps to curb the Covid-19 pandemic, according to a research report by JLL.
Roddy Allan, chief research officer at JLL Asia Pacific, says the expectation that this will overwhelmingly disrupt office markets in the region, for the medium to long term, is “vastly overstated”.
“This is not the first time that many have predicted the demise of the office,” says Allan. “The last time we saw this was with the advent of the Internet. Fast forward, and offices have remained central to daily business life.”
According to data by JLL, global office leasing volumes in 1Q2020 declined by 22% y-o-y as most commercial real estate deals were either cancelled or delayed. In Asia Pacific, leasing activity was down by 9% q-o-q but up 14% y-o-y. The report adds that vacancy rates in the region do not appear to be affected by the pandemic yet; they remain unchanged from the previous quarter at 10.9%.
“For Singapore, the vacancy rate of Grade-A office space in the CBD crept up marginally to 5.0% in 1Q2020 from 4.1% in 4Q2019, while the average monthly gross effective rents contracted 0.1% q-o-q to $10.80 psf from $10.81 psf in 4Q2019,” says Tay Huey Ying, head of research & consultancy at JLL Singapore.
In Singapore, the vacancy rate of Grade-A office space in the CBD crept up marginally to 5.0% in 1Q2020 from 4.1% in 4Q2019 (Picture: Albert Chua/The Edge Singapore)
Anthony Couse, CEO of JLL Asia Pacific, says: “The current situation poses disruption and challenges for the office sector. The way people view and use corporate real estate will change. However, we can expect the office to remain at the heart of employers’ occupational strategies in Asia Pacific over the medium to long term.” Mainland China is one of the first countries to come out of the initial wave of the pandemic, and the initial signs point to a “next normal” that resembles the “old normal”, the report states.
JLL suggests that in some cases, the pandemic may lead to an expansion in demand for office space as some companies try to increase safe distancing, and future office configurations are likely to be redesigned with a need for additional space. “The office, as we know it, will evolve. In fact, we have seen clients increasingly focused on sustainability, wellness and technology. Some have begun making environmental tweaks and upgrades to align with commitments of building trust and ensuring fit-for-purpose spaces,” says Couse.
Allan says: “We do not foresee any large-scale de-densification of traditional spaces. The primary change we may see is the continued redesign of spaces with a focus on the ‘highest and best’ use to deliver organisational and end-user objectives. The office will remain core, but the design revolution will likely gain steam.”
Couse adds that owners and investors who take advantage of the opportunity now to consider their long-term development plans, and re-design or re-fit their office assets, are expected to benefit in the long term.
Some occupiers may turn to third-part flexible workspace operators, as it presents a compelling alternative to achieve short- and medium-term expansion for existing occupiers looking for additional space. However, they will need to be diligent in selecting strong flex-space operators given consolidation projections in the third-party space, the report says.
Several companies are already incorporating flexible workspace as part of their office portfolios to attract and retain top talent. But the report notes that the pandemic has not presented a sustainable or optimal long-term office solution for all corporations.
“In Singapore, while working from home has been feasible for many during the circuit breaker period, it is telling that more than a third of the close to 200 respondents in a recent survey we conducted with Singapore-based corporate clients indicated their preference to work from office post-Covid-19. The lack of a conducive work-from-home environment could be a key contributory factor,” says Tay.
She adds that shared, multi-generational homes are prevalent in Singapore, and the environment makes it difficult for some to have dedicated and conducive home workspaces. According to Singapore’s Department of Statistics, the average resident household size stood at 3.16 persons, and JLL estimates that more than 80% of Singapore resident households lived in homes with three or fewer bedrooms in 2019.
In general, remote working is credited with providing more flexibility and work-life balance, but JLL says that offices still have a central role in creating the space for employees to collaborate, interact, and unite around shared values. They also help to boost staff morale and enhance productivity, the report says.
In the retail sector, the Covid-19 pandemic will also accelerate transitional changes, as the sector has been experiencing disruption from online retail well before the onset of the pandemic, says Allan. He adds that “lower retail space per capita than other regions and a fast-growing middle-class population should ensure a position for the traditional retail model across Asia Pacific”.
A quiet Bugis Junction during Singapore's 'circuit breaker' period. The Covid-19 pandemic is expected to accelerate transitional changes in the sector. (Picture: Albert Chua/The Edge Singapore)
In fact, the current environment has accelerated omni-channel strategies, especially in countries that have high levels of online retail consumption. Retailers, mall operators, and influential opinion-leaders are building online communities which will further spur digital innovation within the sector.
Looking ahead, the report states that Australia and New Zealand are likely to be the next Asia Pacific markets to allow a gradual resumption of professional and social activities. While Vietnam was the first country in Southeast Asia to start lifting restrictions, Thailand looks set to be the next country to start its economic recovery given the success of its lockdown measures.
“As more countries ease lockdown measures and gradually bring their economies online, a recovery should begin to form in Asia Pacific in the second quarter. Weak internal and external demand will continue to restrain growth throughout 2020, but mainland China should lead the way with others to follow in succession,” says Allan.