The office leasing market is getting dull. Office rents are going down and are forecast to drop further.

The area of offices for lease in HCM City in the first half of this year reached about 67,800 square meters, a drop of nearly double year-on-year, according to a market survey by CB Richard Ellis Vietnam (CBRE).

Oversupply

The drop in demand for offices owes to the fact that many companies had to cut costs and delay business expansion plans due to the economic downturn.

The oversupply increased the number of vacant offices. The market survey shows the rate of vacant grade-A office buildings by the end of June was 38%. New office buildings on the market such as Vincom Center and Bitexco Financial Tower had leased out only 35% and 30% of their offices respectively. Meanwhile, high-rises such as Sun Wah Tower, Metropolitan, Diamond Plaza and Saigon Center still maintained their office occupancy rates at more than 95%.

Toby Dodd forecast when he was managing director of Cushman & Wakefield that office rates in HCM City would gradually go down to about VND615,000 (US$29.90)/square meter for grade-A offices, about VND410,000/square meter for grade-B offices and nearly VND205,000/square meter for grade-C offices. This forecast was almost shocking in September 2008 because the office rate in the city downtown at that time was VND1.6 million/square meter, double the rates offered for office buildings in other Southeast Asian cities like Bangkok, Jakarta, Kuala Lumpur and Manila.

Economic fluctuations, coupled with the abundant supply on the market, show Dodd’s forecast may come true when office rates from the third quarter of 2008 had dropped to VND820,000/square meter in the second quarter of 2009 and this has steadily trended down until today.

According the CBRE’s market survey, office rates in the second quarter of 2011 continued to drop. The offering price for grade-A offices was down to VND697,000/square meter. This is the seventh continuous quarter that grade-A office rates decreased and are expected to go down further. Meanwhile, grade-B offices were leased out for VND380,000/square meter and grade-C offices for VND317,000/square meter.

New offices: more competitive

According to Savills Vietnam, sectors that need to lease offices are education, insurance and banking. Grade-B office buildings, with their competitive edge and good locations, continue to be a choice for tenants. Transactions in the recent quarter was mostly the move from old grade-B offices to new grade-B offices with new facilities, equipment and better services. For instance, a Singaporean property company moved its office from a high-rise on Ton Duc Thang Street to the Kumho Asiana building on Le Duan Street, District 1, in early May to enjoy larger space, newer furnishings and lower rent.

The slowdown in business puts owners of office buildings under pressure to seek tenants. In reality, many office buildings need two years to fulfill their leasing area and negotiations on leases also take more time. In contrast, the market is favorable for tenants.

According to Chris Currie, office services director of CBRE, the market trend now forces investors to be flexible in negotiating with clients. Instead of cutting prices, they offer incentives such as exempting rental in the initial time, sharing interior design costs, and reducing or exempting parking fees to attract clients. Many investors apply the gradually increasing rate (the rent for the initial time is much lower than the price agreed on) or allow tenants to expand or diminish the office when necessary.

At present, HCM City has about 1.8 million square meters of offices for lease, including 300,000 square meters of grade-A offices, 697,500 square meters of grade-B offices, and the rest from grade-C offices.

About 298,500 square meters of offices of grades A and B is expected to be supplied next year, part of which will come from the Times Square project on Nguyen Hue Boulevard and the M&C Tower project at the corner of Ham Nghi and Ton Duc Thang streets, District 1.

However, according to Currie, office supply in 2013-2014 could be slow because some projects scheduled for operation at that time are being built slowly, partly due to capital shortage.

According to the CBRE’s forecast, when the macroeconomy is not yet been stable and confidence has not returned, the area of offices for lease from now until the year’s end will probably not increase and is unlikely to reach the threshold of 227,000 square meters as last year.

Source: SGT