Trends to Watch
- Clear Guidelines Around Hybrid Working
CBRE expects companies to focus on implementing hybrid working by adopting clearer guidelines and greater coordination among/within teams. While occupiers would like to secure cost savings by using less space, they hold concerns about the potential impact on productivity, engagement and corporate culture. The challenge for occupiers will be how to redefine the role of the office while accurately gauging space utilisation and creating an agile office network for a far more dispersed workforce.
- Fiercer War For Talent
Although the “Great Resignation” has been more pronounced in the U.S., the pandemic has prompted many white-collar employees in Asia Pacific to seek a more equitable work-life balance. Lower unemployment has sparked a war for talent, with many companies utilising workplace design to attract and retain staff. As remote working will enable employees to be far more mobile than ever before, workplaces will need to be designed in such a way as to attract people and make them want to choose to work there.
- Tighter Environmental, Social and Governance (ESG) Requirements
With more countries pledging to reach carbon neutrality between 2030 and 2060, occupiers are under pressure to comply with ESG standards on sustainability disclosure. This year will see companies exercise more scrutiny in selecting offices based on sustainability and wellness features as well as landlord ESG performance. Green leases, energy audits and resilience will feature more prominently in leasing portfolios.
Leasing Demand Poised for Steady Recovery
Asia Pacific office demand enjoyed a solid 2021, with net absorption registering an increase of 40% y-o-y. While leasing activity as measured by net absorption is forecasted to increase by up to 10% y-o-y in 2022, demand is unlikely to reach pre-pandemic levels until 2023.
CBRE expects 2022 to be characterised by faster decision-making, flight-to-quality relocation and workplace reconfiguration as companies gain confidence in the return to the office and the adoption of hybrid working. Following the emergence of the Omicron COVID-19 variant, initial reaction from North Asia indicates that most companies will continue working at the office, albeit with limits on occupancy or team rotation. Most companies in Singapore returned to the office in January at 50% capacity as originally planned. Elsewhere, the return to the office in India and Australia, currently scheduled for February, is likely to be delayed.
While most Asia Pacific markets will see offices reopen in H2 2022, some have already done so. Google Mobility Index data show that traffic in office districts in Hong Kong SAR, Korea and Taiwan has already recovered to pre-COVID-levels, while mainland China has long resumed office-based working. CBRE believes that the further spread of the Omicron variant will not substantially derail the recovery of office demand.
While hybrid working will be the norm for many companies, especially multinationals, Asian firms will mostly return to office-based working. Firms adopting hybrid working will be more proactive in refining policies and guidelines to maintain productivity, ensuring they can more accurately gauge space demand and types of workspace requirements.
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Expansionary Demand Set to Rebound
Occupiers’ willingness to expand steadily improved over the course of 2021. The latest CBRE's Leasing Market Sentiment Survey found that 48% of leasing enquires were related to additional space requirements, up from 24% in May 2021. While most expansion will be confined to small to medium scale transactions, the uptick in new space requirements indicates a change in sentiment and points to the solid recovery of office demand in Asia Pacific.
With companies in India due to return to the office in Q2 2022, this market has seen a notable improvement in leasing sentiment. While leasing sentiment in mainland Chinese tier I cities was strong in 2021, activity is expected to moderate in 2022 following recent policy changes impacting the online education and gaming sectors and difficulties experienced by over-leveraged developers. Leasing is projected to increase in Hong Kong SAR, Japan and Australia, but activity in Singapore and Korea will be limited by new supply.
Flight-to-quality relocations will be a major driver of demand in 2022. A heightened emphasis on sustainability and wellness will also trigger upgrading to green buildings.
The tech sector overtook finance as the main driver of office demand in 2021. In 2022, expansion by advanced technology, social networking and software development companies will be most prominent. Growth within the financial sector will mostly be driven by insurance, fintech and wealth management firms, while large banks will remain quiet as they continue to review portfolios. Life science demand will continue to grow, while demand from flexible office platforms rebounded in H2 2021 as some providers sought to shift away from traditional leases to partnerships with landlords through management contracts.
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China and India Account for Bulk of New Supply
After a relatively manageable pipeline in each of the past two years, new Grade A office supply in Asia Pacific is projected to increase by 15% y-o-y to nearly 67 million sq. ft. NFA in 2022, the highest total in more than a decade.
With almost half of new supply located in mainland China, cities including Shanghai and Shenzhen will experience a supply peak in 2022. Most supply pressure will be in non-CBD areas, which accounts for 90% of new space, ensuring occupancy in CBD locations remains resilient.
India will account for 30% of new regional supply in 2022. Despite a surge in COVID-19 infections last year, most pre-committed space in this market is due to be delivered on schedule.
Other markets expected to see the addition of ample new options for occupiers seeking flight to quality and upgrading moves include Tokyo, Hong Kong SAR and some Southeast Asian countries.
The remaining markets in the region will see limited new supply, with Korea expecting no new stock in 2022, and Sydney and Melbourne experiencing net stock withdrawal. Most of these markets continue to report lower vacancy, which will intensify competition for prime space.
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Rents Expected to Resume Growth
Despite abundant new supply, resilient Grade A rents in prime locations and newer, greener buildings will ensure the market exits its longest downward rental cycle in 20 years. CBRE expects Grade A rents to grow by around 1% in 2022. Several markets saw a return to rental growth in 2021 and will remain on an upward trend in the coming year. These include Singapore, Auckland, Seoul and Taipei, which will benefit from tight vacancy and limited new supply.
Greater China markets saw a return to rental growth in H2 2021, driven by flight-to-quality relocation and demand from industries supported by central government policies. Shanghai was the first city to see a rental rebound, with the upward trend set to continue this year. However, Guangzhou will underperform due to softer demand from the gaming and real estate development sectors. In Hong Kong SAR, rents in Central will stabilise temporarily ahead of new supply in this submarket due to come on stream in 2023.
Incentives in most Australian markets are expected to stablise or tighten in 2022. Coupled with reduced availability amid stock withdrawal, Sydney and Melbourne will record mild growth in net effective rents. However, it will likely take four to five years for Grade A rents to return to pre-pandemic levels after two years of steep rental declines.
Landlords in India will be under less pressure to increase incentives. While the rental market is improving, the return to the office in Q2 2022 will serve as a key barometer of recovery.
Although the rental decline in Tokyo has decelerated in recent quarters, the city will remain the region’s main laggard due to escalating Grade A vacancy, which will rise to 4.3% by 2024.
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From Strategy to Action
- Proactively secure space as the window of opportunity for rental negotiations narrows.
Focus on higher quality assets that can accommodate flexible workspace design; offer better amenities and services; provide the latest technology; and possess green and sustainable features.
Analyse workplace utilisation under remote working models and redesign workplaces accordingly.
Adopt a core-plus-flex space model to enhance portfolio flexibility and leverage new flex products to tailor to end-user demand.
Establish a roadmap to adopting an ESG agenda from green buildings, to energy audits, to green leases.
- Prioritise occupancy over rents in oversupplied submarkets.
Prepare for the recovery of expansionary demand in better quality buildings.
Incorporate flexible space into office portfolios and consider partnerships with coworking operators.
Invest in smart and green buildings, including retrofitting older stock.
Prepare for new ESG requirements by embedding sustainability into every stage of the building life cycle such as planning, design, construction and operations.