SINGAPORE -- The coronavirus pandemic will likely lead to an oversupply of office space across Asia as companies think twice about committing to fresh leasing contracts.
According to London-based property consultancy Knight Frank, 73% of major Asia-Pacific office markets have recorded declines in leasing activity in the four weeks to April 14, including Shanghai, Beijing, Taipei, Seoul, Bangkok, Kuala Lumpur, Singapore and Jakarta.
Hong Kong, Guangzhou, Shenzhen and Manila were the only four markets that registered stable leasing activity, Knight Frank said in a report that found many international commercial occupiers postponing deals.
"The need to preserve cash and reduce capital expenditure is inevitably putting a hold on corporate real estate decisions," said Tim Armstrong, head of occupier services and commercial agency for Knight Frank, Asia Pacific.
There will be upside for tenants, Knight Frank noted, with landlords in across mainland China, Hong Kong and Singapore already lowering asking rents.
Overall, 70% of the region's office markets have now tilted in favour of tenants, Knight Frank said, as leasing activity slowed considerably as strict social distancing measures forced most office workers in Asia to stay home through enforced lockdowns.
In a survey of 150 companies in China, Japan, Malaysia, the Philippines, Indonesia, Singapore and Thailand, Knight Frank said 28% of respondents expected to reduce the amount of office space taken up, compared to 5% who projected an increase, and the rest anticipating no changes.
Even as countries like China and South Korea look at easing lockdown measures aimed at slowing the rate of infections, fresh concerns over new waves of coronavirus transmissions have surfaced, dampening optimism that economies could soon return to normal.
"For those markets re-opening, leasing activity remains slow," Justin Eng, Associate Director of Research and Consultancy at Knight Frank told the Nikkei Asian Review.
"Any transactions being done currently tend to be lease renewals as landlords implement more flexible leasing strategies to retain their existing tenants or attract occupiers looking for cost-saving opportunities," he said.
Real estate services firm Cushman & Wakefield said the vacancy rate for prime office space in Shanghai was driven to a new record high of 21% in the first quarter of this year, with buildings with a large percentage of small and medium-sized enterprise tenants seeing vacancy spikes.
These smaller businesses have been feeling the brunt of economic pullback as a result of the pandemic, with many forced to reduce operating costs as their cash flows have been hit the hardest by the various lockdown measures.
In Singapore, Cushman reported that leasing demand has weakened significantly as market sentiment plunged due to the COVID-19 outbreak, with firms pausing expansion plans and adopting a wait-and-see approach.
Rents for prime office space in Singapore fell by 0.5% in the first quarter, with core business locations like Marina Bay and Raffles Place taking hits.
Facing the double impact of a global and local recession, Cushman tipped Singapore's prime office rents fall by up to 10% this year, with further declines expected in 2021.
"In other cities, supply chain disruption has made physical moves more challenging. Finally, companies are now asking the question -- what type of space do we actually need?" Mark Lampard, Head of Regional Tenant Representation at Cushman told Nikkei.
"Those countries and cities which have implemented significant lockdown measures and for a longer duration have been most impacted. Countries such as India and Singapore are still in restriction mode and are being highly impacted," he added.
In its poll of more than 250 office occupiers in the Asia-Pacific done from Mar. 23 to Apr. 5, real estate services company CBRE found two in three respondents saying they have delayed decisions to lease physical premises due to the pandemic.
"From our own conversations with clients, we believe that businesses will be more acceptable of remote working and flexible space, driven particularly by rising cost pressures," Manish Kashyap, Head of CBRE's Advisory and Transaction services business in the Asia-Pacific told Nikkei.
But even while the pivot towards remote working with the aid of technologies like online video conferencing has made scores of companies realise that business can still go on without the use of office space, Kashyap did not think it would spell the death of the commercial leasing sector.
"What we are seeing from our client interactions is this won't be a trend that translates into people working from home permanently and still think of the office as an important part of their work culture," he explained.
Sumir Bhatia, President of Lenovo Data Center Group for the Asia-Pacific told Nikkei that the shift means that working from home has become a necessity for business operations, and not just a perk, forcing firms to introduce policies to cope with the decentralizing of their activities.
"We're at the start of a new 'smart normal' which will impact businesses well beyond 2020, and ultimately change the relationship between companies and traditional office space," Bhatia said.