By Poovenraj Kanagaraj
In a special report by CBRE Research, ‘Four Months into Covid-19: The Negatives, The Positives and The Unknowns’, CBRE has pointed out that office demand in Asia Pacific has weakened significantly owing to the double impact of the fading economic growth prior to the onset of the virus outbreak.
Demand in Greater China and Singapore was the first to be affected with net absorption in Mainland China turning negative in Q1 2020. Other markets had also started showing signs of slowdown in leasing activity towards the end of the quarter as lockdown and social distancing measures came into force.
“The full extent of the decline in demand will became more visible in Q2 2020,” CBRE stated.
In terms of leasing processes, CBRE’s April Asia-Pacific Occupier Flash Survey found that at least two-thirds of respondents had experienced delays to the process, including postponements of site visits and suspension of expansionary plans.
“Even if Covid-19 is brought under control relatively quickly, leasing demand will take some time to recover to pre-outbreak levels owing to rigorous approvals for capital expenditure.”
Some of the short-term downside risks to office demand will include more headcount reduction, along with faster consolidation in the flexible space industry, which could trigger more merger and acquisition activity and lead to consolidation as well as the closure of centres.
Additionally, there will be disruption to new supplies for the remainder of the years as disruption to global supply chain has led to a shortage of construction materials. The trend is expected to be prevalent in India and China both which typically see a slippage ratio of 20 percent every year.
Construction delays in Singapore will also be prominent and are set to affect new supply in 2021 and 2022.
The report also highlights on rent abatement as a result of sharp decline in business activity, a trend first noted in Greater China and subsequently in other markets. According to CBRE, landlords and investors are increasingly concerned about rising vacancy risk resulting from weak demand owing to the impact this will have on cashflow and valuations.
Rent abatement is adding to downward pressure on Asia Pacific Grade A office rents, which fell by o.6 percent Q-o-Q in Q1 2020.
Furthermore, the rise of the work-from-home trend is also expected to be a permanent feature of the Asia Pacific office landscape. “Several multinational technology and financial companies have already announced the extension of work-from-home policies to the end of 2020.” CBRE said.
Twitter for instance has told its staff that they can keep working from “forever if they wish”.
“Combined with increased vigilance around health and safety, a more fluid office-based workforce will require occupiers to re-think their workplace requirements, particularly workstation size, desk spacing and meeting room and social area capacity,” said CBRE.
However, on the bright side the easing of lockdowns have seen office-based employees in several countries – Greater China, South Korea and Vietnam – return to work, while employees in other markets are gradually expected to do the same.
CBRE believes it is too early to ascertain how office space demand will evolve in individual markets. The process of portfolio rebalancing will take at least two to three years before occupiers achieve an equilibrium that satisfies all these requirements.