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Thursday, June 20, 2024

Office market yet to see much negative impact from Covid-19

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HCMC – The coronavirus outbreak cast a shadow over many sectors in the past few months, but the HCMC office market has yet to record a significant negative impact from the pandemic in the first quarter of this year.

CBRE Vietnam, in its Q1 2020 report, noted that the average asking rent in the Grade A segment was recorded at US$44.6 per square meter, a decrease of 1.2% q-o-q and 3.6% y-o-y. This decline was due to the relocation of tenants at some Grade A buildings, and many landlords being forced to reduce rental rates to attract new tenants.

As the market had one new supply located in a prime location within the CBD, and its rent was higher than the average rental rate of Grade B, the rental rate of this segment increased by 1.8% q-o-q and 7.4% y-o-y, equivalent to US$25.2 psm pm.

In terms of vacancies, the Grade A segment’s vacancies were reported at 10.8%, a slight increase of 1.7 ppts q-o-q and 8.2 ppts y-o-y, due to some large tenants moving out from those buildings due to the low-quality of management.

Grade B segment, on the other hand, registered a vacancy rate of 5.6%, up slightly by 0.6 ppt q-o-q and 2.1 ppts y-o-y, due to the new supply entering the market in the review quarter.

Although yet to record a significant impact from Covid-19, the market began to witness many tenants persuading landlords to reduce rental rates by 15-20% in order to mitigate their rental costs and compensate them for their revenue losses.

In return, landlords have been providing various financial incentives, such as deferments or extensions of payments. If the disease is exacerbated, landlords may reduce rental rates for tenants, in the short term.

Also, CBRE recorded some delayed and canceled transactions by the end of Q1 2020, as international tenants were facing difficulties in visiting potential sites.

Such travel restrictions will possibly lead to a decrease in absorption of new supplies, especially when the HCMC office market is expected to welcome more than 70,000 sqm by the end of 2020.

According to CBRE, the market vacancy rate will increase, regardless of how soon the disease will be contained. Should the disease be contained before June 2020, the vacancy rate will only increase from 7% to 14%.

However, if the disease lasts until September 2020, then the vacancy rate of the office market might escalate to 14-16%.

In terms of rental growth, before Covid-19 the HCMC office market was expected to witness some upside movement in 2020. In Q1 2020, the market has not reported significant negative impacts from the pandemic on rental rates.

CBRE projected that if the outbreak is to be contained before June 2020, the rental growth outlook might still remain positive. Landlords will consider providing more incentives to attract new tenants and as back-ups in case of the possible reduction in current tenants.

However, if the disease is contained by September 2020, the outlook will be more bearish, with rental rates expected to decrease by 8-10%, as companies witness more revenue losses and will request landlords to reduce rents.

On the bright side, the Covid-19 outbreak is an exceptional opportunity for the expansion of flexible workspaces and decentralized office buildings.

Tenants may come to realise the importance of flexible leasing terms during times of such economic and business disruptions, when they are forced to scale down their operations with the risks of bearing significant rental costs, while not generating much revenues.

Duong Thuy Dung, senior director of CBRE Vietnam, commented on the office market trends, noting that after the Covid-19 pandemic, the office market will be shaped by new trends, in which tenants will prioritize agile working options, such as leasing flexible workspaces or distributing workforces into offices across the city.

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