Pressure to further reduce office space requirements nevertheless began to ease as the macro economic environment became somewhat calmer and, in the case of China, began to recover and improve. Most Asian cities either recorded a smaller negative net absorption or a mild increase in office requirements. Overall vacancy for Asian cities rose 0.6% quarter-on-quarter 12.5% in the second quarter, but the rate of increase slowed from 1.2% in the previous quarter.
In Bangkok, the total amount of occupied office space increased over the last six months, but only by 22,131 square metres. Total office supply as of Q2 2009 was 7.86 million square metres with a vacancy rate of 14.0%, compared to 14.2% at the end of Q1 2009. Grade A CBD rents decreased 5.7% year-on-year, standing at THB 700 per square metre per month for 200 – 300 square metre transactions.
There is very little new office space under construction. The Energy Complex on Vibhavadi-Rangsit Road, comprising 119,000 square metres, will be completed in Q4 2009, but this has been fully let to PTT and affiliated companies.
In 2010, only Sathorn Square, Golden Land's grade A development next to the Chong Nonsi BTS station will be completed with 73,500 square metres and Sivatel with 5,880 square metres on Wireless Road. In 2011 the only new office building in Bangkok will be Park Ventures with 28,000 square metres on the corner of Wireless and Ploenchit Roads.
"With such a limited amount of new supply, any increase in the amount of occupied space created by a recovering economy will lead to an increase in rents," said Mr. Nithipat Tongpun, Executive Director and head of Office Services at CB Richard Ellis Thailand.
Retaining existing tenants and attracting new ones remained the top priority for office landlords in Asia. In many markets, office landlords displayed a definite willingness to negotiate lease restructuring and offer more incentives to desirable corporate occupiers. However, leasing markets were sluggish overall and office rents remained caught in the down cycle. According to the CB Richard Ellis Asia Office Rental Index, overall office rents in Asia fell 6.7% in the second quarter, decelerating slightly from the 8.1% decline witnessed in the previous quarter as most cities underwent a milder rate of rental reduction.
Occupier activity in Tokyo was slower than expected in the second quarter. The majority of transactions concluded comprised either renewals in which existing occupiers achieved reduced rental costs in exchange for committing to longer lease terms, or corporate flight to quality in which companies opted for better locations without assuming higher rental costs.
Although economic conditions in South Korea improved during the review period, demand for quality office space in Seoul continued to shrink. The average vacancy rate for grade A offices climbed to 3.1% in the second quarter from 2.2% in the first quarter.
The Chinese government's implementation of its four trillion Yuan stimulus package continued to help bolster business confidence in China during the second quarter. In Beijing, prime office demand from overseas companies began to rise and a number of major leasing transactions involving foreign companies were completed. However, in Guangzhou it was domestic occupiers, particularly state-owned enterprises with monopolistic positions in certain industrial sectors, who comprised the main source of demand for prime office space. Both cities enjoyed a significant increase in net absorption over the second quarter. Elsewhere, Shanghai edged towards positive absorption as overall sentiment improved, although the city continued to record negative net absorption during the review period.
In Taipei, the commercial property investment market performed well in anticipation of closer economic ties with Mainland China, prompting landlords to raise their rental expectations during the second quarter. However, office occupiers seemed disconnected from the optimism displayed by landlords as they struggled to make ends meet under the present tough economic environment.
Overall demand for office space in Hong Kong remained weak during the second quarter, directly reflecting the fact that the city is home to a sizeable concentration of MNCs and international financial institutions that have been directly impacted by the current crisis. The Central CBD, which accommodates many overseas banks' Asian headquarters, witnessed an extremely sharp quarterly decline in rentals, and rents remained generally soft across all office sub-markets.
Singapore is also home to the Asian headquarters of a large number of MNCs and consequently saw the further weakening of prime office demand during the quarter. Prime rents have now fallen 46.6% from the peak recorded in Q3 2008 and occupancy rates will continue to face pressure from substantial new supply. Singapore has some 770,000 square metres of new office space in the development pipeline between now and 2013 and it seems certain that for the short term at least, supply will continue to outstrip demand.
In India, the election of a new government and falling interest rates improved local business sentiment during the second quarter. Although there were some small signs of improvement, Mumbai, Delhi and Bangalore witnessed office rents slide further as buildings in the CBD saw an exodus of occupiers as corporates moved to alternative locations in order to reduce real estate costs. Although the rise in demand for less costly premises bolstered office sub-markets outside the CBD, landlords of buildings in secondary office destinations struggled with the consequences of speculative overbuilding and were forced to increase incentives to recruit tenants.
Jakarta was the only city in Asia where rentals held firm, while Kuala Lumpur saw only a mild rental correction within the period under review. In Ho Chi Minh City, the low rent strategy adopted by the newly completed Centec Tower, the first grade A building to come on stream in a decade, drove average grade A rents down by 28.8% from the previous quarter.
CB Richard Ellis anticipates that the Asia office occupier market is witnessing demand beginning to stabilise and business confidence turn slightly more positive as clearer signs of economic recovery emerge. However, the recovery Asian economies are currently experiencing is unlikely to translate into the kind of brisk corporate expansion witnessed during the 2005 and 2007 period. Rather, it is anticipated that corporate occupiers will continue to adopt a conservative approach towards real estate decisions, especially those that would lead to an increase in operating costs. With respect to companies in Asia with operations which do not need to be situated in prestigious locations, many remain receptive to relocating these elements to lower cost premises, sometimes even opting for less mature business precincts in exchange for substantial savings.
