Office Rentals Are Down – But Should You Sign A Longer Lease In 2021?

Singapore office space declined in 2020

According to the Urban Redevelopment Authority (URA), office rents in Singapore’s central region declined by about 8.5% in 2020. This was on the back of the worst recession in Singapore’s history induced by COVID-19, which saw the economy contracting 5.8%. 

Even before COVID-19 though, Singapore’s office rental market was on the down – dipping 3.1% in 2019.

Source: URA

While certain business sectors continue to be plagued by the economic fallout from COVID-19, many businesses are thriving and many more are beginning to see the light at the end of the tunnel.

Since office rentals are on the down, this could present an ideal time for many businesses to negotiate hard for a good deal and sign a longer lease to lock in a rental rate they’re comfortable with.

Read Also: 5 Types Of Businesses In Singapore That Are Set To Grow In 2021 And Beyond

Here are some pros and cons for businesses to do so.

Con 1: Work-From-Home Is A Structural Shift In Working Requirements

While office rents are being depressed due to subdued economic activity, vaccine developments and relatively low transmission rates in Singapore is a positive sign that business may return to normal soon.

However, even if business returns to normal, work-from-home is possibly a structural shift in working habits that may be here to stay. With more employers onboard, demand for office space may gradually trickle down. In turn, this will soften office rental market.

What may seem a “good rent” today, may become the norm in the near future, and may even seem high after a few years. Locking your business into a long-term rental contract may force you to pay a rent that is higher than the market rate after a while.

Con 2: Lose Your Flexibility To Change Your Working Arrangement 

Taking advantage of lower rents may be a good idea. However, even if rental rates do gradually increase, you are locking yourself into a work arrangement that may be unsuitable for its requirements.

For example, your business may be thinking of rotating half its workforce to work-from-home, while the other half works from the office. This Team A-Team B rotation is not uncommon. However, by locking yourself into a long-term rental lease, you cannot easily upsize if you want to bring all employees back to the office. 

Similarly, if you are locked into a longer lease with enough space for all employees, you may not be open to allowing more employees work from home as downsizing your office space is not an option. 

Either ways, you lose the flexibility of changing to a different working arrangement that is more suitable, because you’re locked into a long rental lease.

Read Also: Work-From-Home To Remain As Default Work Arrangement In Phase 3: Guidelines To Follow

This problem is further exacerbated if rentals continue to stay sideways or go down. Even if rentals gradually go up, landlords may not be very willing to allow a long lease, albeit one that is slightly below market rate, to be broken.

Con 3: No One Knows How Long COVID-19 Will Depress The Global Economy

Singapore may be managing the COVID-19 pandemic well, albeit after major hiccups in the initial phase. However, the rest of the world is being plunged into second waves and deadlier variants of the COVID-19 virus.

As Singapore is a trade-reliant economy, the longer the global economy takes to recover, the longer it will take to recover.

This may keep office rentals depressed for an unknown period of time.

Con 4: You Don’t Know Whether Your Business May Become Affected

If your business is coping well with the current COVID-19 downturn, there’s still no guarantee that it will continue to cope well the longer the pandemic persists. Eventually, your business may become affected as the slowdown hits more parts of the economy.

On the other side of the argument, if your business has been a beneficiary of the COVID-19-led downturn, there’s no guarantee it will not return to pre-COVID-19 levels once vaccines are rolled out and the economy recovers.

Again, either ways, your business will not benefit from being locked into a longer rental lease – whether it is a good rate or not.

Pro 1: Vacancy Rates Are Down – Potentially Pointing To A Recovery?

After reaching a vacancy rate of over 12% in 2Q 2020, vacancy rates have shrunk for two quarters in a row to 11.8%.

Source: URA

Businesses that can lock in favourable long-term rates may enjoy lower rents for years to come, as office market rentals bounce back.

Pro 2: New Office Stock May Take Longer To Become Available

In addition, the chart above also shows that available office space has shrunk for two quarters in a row – indicated less supply in the market. This suggests that supply that was supposed to hit the market in 2020 did not materialise, while available stock has also become unavailable.

According to statistics from the URA website, only about 175,000 sqm of office space received TOP status in 2020, compared to an expected 228,000 sqm. 

From what can only be assumed to have been caused by COVID-19 delays, from an expected 595,000 sqm of office space that was supposed to come into the market between 2020 and 2022, only 400,000 sqm (including the 175,000 sqm already TOP in 2020) is going to become available.

Pro 3: Potentially Greater Than Expected Demand From Businesses

Despite the worst economic contraction on record in Singapore, more business entities were formed in 2020 (63,480) than compared to 2019 (61,573). This shows that opportunities continue to exist despite what can only be described as a bad year for business.

On top of this, fewer businesses actually shut down in 2020 (43,335) than compared to 2019 (47,504). This arguably shows that businesses had greater staying power despite the record economic slump. 

Of course, government schemes and grants did help businesses to combat the adverse effects of COVID-19. While the rapidly changing business landscape may have led to the proliferation of new businesses in Singapore.

Read Also: 5 Reasons Singapore Businesses Should Consider Hiring In 2021

This is further supported by positive news of US and Chinese companies such as Zoom, Twitter, Paypal, Tesla, and Alibaba, Tencent, Bytedance (owner of Tik Tok), coming into the Singapore market to grow in this part of the region. In fact, Alibaba acquired a 50% stake in AXA Tower, and along with the other owners, intend to redevelop the 50-storey office property.

At the same time, there has also been a slew of high-profile home offices being opened in Singapore. The latest being Google’s co-founder Sergey Brin opening his family office in Singapore. Other recently announced family offices include billionaire investor, Ray Daliobillionaire founder of Dyson vacuums, James Dysonbillionaire behind Haidilao hot pot empire, Shu Ping, and others.

Correspondingly, these companies will likely have to set up a physical presence. This bolsters the case for a rising demand of office space.

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