Office development back in favour

Office development back in favour

Office development has been out of favour in Bangkok since the 1997 Asian crisis but now more developers are planning new office buildings in Bangkok as rentals have increased every year since 2010.

During the Asian financial crisis in 1997-98, Bangkok office rents fell by more than 30% and the vacancy rate rose to almost 40%.

The recovery has been slow and developers have focused on other sectors such as condominiums and in the income-producing sector -- hotels and shopping centres.

Attitudes are now changing as office vacancy rates continue to fall and rents continue to rise.

Since 2000, the total supply of office space in Bangkok has grown by 1.5 million square metres, with a total supply today of 8.56 million sq m. The total takeup rate (the growth in the amount of occupied space) has been 3.2 million sq m during the same period.

With new demand exceeding new supply, vacancy rates have fallen from 32% in 2000 to 7.7% today.  Grade A office rents have risen by 150% since 2000, with only a brief dip during the global financial crisis.

Currently, there are only 500,000 sq m of office space under construction in Bangkok which is due to be completed between 2017 and 2019.  If the takeup continues to be 200,000 sq m per year or more, the vacancy rate will fall further and rents will continue to rise from their current rate of 5-9% per year. 

More developers are now looking at the office sector which has seen the best income growth performance compared to other property sectors with a 40% increase in CBD grade A rents since 2010. Hotel average daily rates in Bangkok have only increased by 15% in the same period, expatriate rental housing allowances have not increased and retail rental increases have slowed because of limited growth in retail sales.

Currently, the office sector looks attractive because of rising rents, steady demand and limited future supply up to at least the end of 2020.

This may change as developers have acquired sites where they have publicly announced that they will build offices for rent.

CBRE's research team believe that up to 2 million square metres of space could be built on these planned office sites.

Most of these sites are either next to or close to existing mass transit stations or those under construction.

The big question is when construction will start on these planned projects. If development was to commence on many of these sites this year, then the projects would be completed by 2021.

Based on current levels of demand, the market can absorb about 200,000 square metres of space in one year.

If the amount of new space completed at the same time significantly exceeds demand then vacancy will rise and developers of these new buildings will have to discount rents to attract tenants.

In the residential sales market in Bangkok, each location has its own set of dynamics and price movements are independent of other locations in the city because some people only want to live in a specific area.

The office market is different and tenants although they may prefer a certain location such as Wireless Road, Sathorn or Sukhumvit, they are flexible and will choose one location over another within the CBD if the rent is cheaper and the building quality is similar.  In this respect, the office market is more like a commodity with rents going up and down across a broad area.  No one area in the CBD has a mutually exclusive pool of demand allowing landlords to set rents much greater than other locations.

If rentals rise dramatically in the CBD, tenants are price sensitive and will consider non-CBD locations if the difference in rents between CBD and non-CBD is significant for similar quality buildings as cost is still a significant decision making factor.

The future of the Bangkok office market is therefore dependent on when construction starts on all the planned developments with many developers hoping that their competitors will start later, avoiding all of the new supply coming on line in a big wave and exceeding the annual demand.


Nithipat Tongpun is executive director, head of Office Services, and Thatchanan Siddhijai is senior analyst, CBRE Research & Consulting, CBRE Thailand. They can be reached at Facebook: CBRE.Thailand Twitter: @CBREThailand LinkedIn: CBRE Thailand and website: www.cbre.co.th

 

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