Bangkok Office Knightfrank.co.th/Research · Index < 50 indicates that the respondents’ business sentiment has deteriorated from the previous month. Thailand’s GDP contracted

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Commercial Research

Bangkok OfficeMarket Overview Q3 2020

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BANGKOK OFFICE MARKET OVERVIEW Q3 2020

HIGHLIGHTS

As companies extended “work from home” policies and adopted “work from anywhere,” the numbers of empty desks in offices throughout Bangkok has grown. This unused or under-utilized space is difficult to measure, but in the commercial real estate industry this space has an ominous sounding term: “Shadow Space”. Shadow Space can be thought of as a building’s hidden vacancy rate. Tenants typically cannot sub-let surplus office space without the landlord’s consent and usually cannot return unused space before the end of the lease term, unless they can assign that space to a replacement tenant. So in a very real sense, Shadow Space is also competing with traditional vacant office space for tenants. So how much Shadow Space is out there? The short answer is that nobody really knows. What we do know is the amount of space that is being returned to landlords is growing, with some tenants reportedly returning 30% -50% of their office space. Whilst the proportion of space returned in the market overall this quarter was a lot lower, it could still leave a significant impact on the market going forward.

TOTAL SUPPLY INCREASED BY 0.6%

Q-O-Q TO 5.41 MILLION SQ M.

1

QUARTERLY NET ABSORPTION

DROPPED TO A 10-YEAR RECORD

LOW OF -78,185 SQ M.

2

TOTAL OCCUPIED SPACE DECLINED BY 1.1% Q-O-Q

TO 4.67 MILLION SQ M.

3

THE MARKET OCCUPANCY RATE DROPPED BY 1.4% POINTS Q-O-Q TO 86.2%.

4

THE AVERAGE ASKING RENT FELL BY 0.3% Q-O-Q

TO 794 BAHT PER SQ M PER MONTH.

5

““

MARCUS BURTENSHAWExecutive Director, Head of Occupier Services and Commercial Agency

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OFFICE PROPERTY MARKET INDICATORS

5.41MSUPPLY(sq m)

4.6%

0.6%

4.67MOCCUPIED SPACE

(sq m)

0.8%

1.1%

794ASKING RENT

(THB / sq m / month)

1.2%

0.3%

86.2%OCCUPANCY RATE

4.7% pts.

1.4% pts.

% Change

Q-o-Q

Y-o-Y

60

55

50

45

40

35

30

Sep-16

Dec-16

Mar-17

Jun-1

7

Sep-17

Dec-17

Mar-18

Jun-1

8

Sep-18

Dec-18

Mar-19

Jun-1

9

Sep-19

Dec-19

Mar-20

Jun-2

0

Sep-20

BSI BSI (next 3 months)

FIGURE 1THAILAND BUSINESS SENTIMENT INDEXSQ M

SOURCE: BANK OF THAILANDInterpretation of the index is as follows: Index = 50 indicates that the respondents’ business sentiment remains stable from the previous month; Index > 50 indicates that the respondents’ business sentiment has improved from the previous month; Index < 50 indicates that the respondents’ business sentiment has deteriorated from the previous month

Thailand’s GDP contracted by 6.4% Y-o-Y in Q3 2020, improving from a 12.1% contraction recorded in the previous quarter. Over the first 9 months of 2020, the Thai economy contracted by 6.7%.

Private consumption expenditure fell by 0.6%, improving from a 6.8% contraction in Q2. Most notably, non-durable and service items expanded by 2.7% and 3.8% respectively. This can be attributed to the easing of lockdown measures and the implementation of government policies to combat the detrimental effects of COVID-19, which resulted in some recovery of economic activity and domestic consumption. Government consumption expenditure expanded by 3.4% following a 1.3% increase in the previous quarter. Meanwhile, total investment declined by 2.4%, improving from an 8.0% contraction in Q2. Private investment fell by 10.7% as machinery items experienced a 14.0% reduction in investment. In contrast, public investment expanded significantly, rising by 18.5%. This was mainly driven by an 18.4% expansion in public machinery items and an 18.6% increase in public construction. Exports and imports of goods and services dropped by 23.5% and 20.3% respectively. The reduction in global demand for agricultural and manufacturing products continued to dampen merchandise exports, which fel l by 7.7%. Weakened domestic purchasing power and low private sector

demand resulted in a 17.0% decline in merchandise imports.

In September, the Business Sentiment Index (BSI) increased for a fi f th consecutive month to reach 47.5. As the BSI increased but remained below the 50-threshold, it implies that business confidence had increased but was still weak because a significant amount of

respondents stated that their business sentiment was lower than in the previous month. On the other hand, the 3-month expected BSI was recorded at 51.1. This indicates that respondents expected business conditions to improve but still had lower confidence than they did pre-COVID-19.

ECONOMIC OVERVIEW

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Total supply increased by 0.6% Q-o-Q to 5.41 million sq m following the completion of 3 new office buildings. From the 30,900 sq m of new supply, only 5,700 sq m was added to the CBD. For the 6th consecutive quarter, there were no withdrawals of obsolete stock.

SUPPLY FUTURE SUPPLY

6,000,000

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

0

Q32011

Q32012

Q32013

Q32014

Q32015

Q32016

Q32017

Q32018

Q32019

2020F 2021F 2022F 2023F

Supply Supply (Projected)

FIGURE 2BANGKOK OFFICE SUPPLYSQ M

SOURCE: KNIGHT FRANK (THAILAND) – OCCUPIER SERVICES & COMMERCIAL AGENCY

CBD Non-CBD

Q4 2020 2021 2022 2023 2024 2025 2026

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

0

FIGURE 3BANGKOK OFFICE FUTURE SUPPLYSQ M


Based on current forecasts, another 73,400 sq m of office space is expected to be added to the market before the end of this year. Around 71% or 52,400 sq m of projected new supply during this period will be located in the CBD. Over the past 5 years, new supply entered the market at a rate of approximately 159,000 sq m each year. In comparison if launches in Q4 through to 2026 do proceed as planned, the Bangkok office market will grow by around 1.48 million sq m or an average of 236,541 sq m annually (accounting for only additions and not withdrawals).

The supply growth rate during this period is heavily skewed towards the earlier years as around 1.08 million sq m of the new supply is projected to be added by 2023. This may place even stronger downward pressure on both rents and occupancy over a short period of time unless demand picks up rapidly. It is also possible that COVID-19-related construction delays and a rise in withdrawals of obsolete stock could counteract the effects of a probable oversupply in the market by a gradual and limited extent.

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Leasing activity in the market was limited as total take up was at 45,000 sq m, down from 74,800 sq m recorded in the previous quarter. The latest figure is also 33% lower than the 10-year average quarterly take up rate at 67,400 sq m. Along with limited leasing activity, a large amount of space was returned to the market as 96,200 sq m was vacated by tenants. Combined, this led to a net absorption dropping even further to – 49,700 sq m, the lowest level recorded over the past decade. On an annual basis, a net 78,185 square meters of space was returned to the market over the first 9 months of 2020. This stands in stark contrast the 179,271 sq m growth in supply over the same period, which indicates that the gap in supply and demand has widened even further. Consequently, total occupied space declined by 1.1% Q-o-Q to 4.67 million sq m. Companies continued to execute their revised real estate strategies,

DEMAND

Take Up Space Vacated Net Absorption Net Supply Change

2011 2012 2013 2014 2015 2016 2017 2018 2019 Q3 2020(YTD)

0

150,000

250,000

350,000

50,000

-50,000

-150,000

-250,000

-350,000

179,271

-78,185

FIGURE 4BANGKOK OFFICE SUPPLY – DEMAND DYNAMICSSQ M


100%

98%

96%

94%

92%

90%

88%

86%

84%

82%

80%Q3 2012Q3 2011 Q3 2013 Q3 2014 Q3 2015 Q3 2016 Q3 2017 Q3 2018 Q3 2019 Q3 2020

82%

86%86%

91%

A B C Market

FIGURE 5BANGKOK OFFICE OCCUPANCY RATE BY GRADE


which unsurprisingly, can primarily be characterized by the reduction of footprint as a cost-saving measure. As the effects of COVID-19 continued to subdue economic activity, an increasing number of firms may have shut down and exited the market entirely. Interestingly, there has been a rise in interest for office space via subletting as it can offer greater lease flexibility, reduced rents and an existing fit out. Although this practice has been highly restricted by landlords in the past, a greater number may be more open to the option going forward as they will be faced with the possibility of the current tenant vacating the space with low prospects for a favorable replacement.

Reflecting the severely weakened level of market activity, the market occupancy rate dropped by 1.4% points Q-o-Q to 86.2%. This is 6th consecutive quarterly decline which puts the occupancy level

at its lowest point since the first quarter of 2012. It is also below the 10-year average occupancy rate at 90%. Although initially impacting higher grade buildings to a greater extent in the previous quarter, the market slowdown impacted occupancies similarly across the board in Q3. The occupancy rate declined by 1.4% points Q-o-Q for grades A & B properties and 1.3% for grade C properties. All segments underperformed their long-term averages.

The market occupancy rate declined by 1.3% points for properties located in the CBD and by 1.4% for properties located outside it. So far, the sub-market that seems to be the most resilient is Bangna as the occupancy rate declined by only 0.3% points whilst it fell by at least 1.0% points in other sub-markets. However, Bangna is also still the weakest sub-market tracked as only 75% of the office supply is occupied.

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RENTAL RATES

Rents have started to yield to the heavy downward pressure, as the average asking rent declined on a quarterly basis for the first time since Q4 2011. The average asking rent fell by 0.3% to 794 baht per sq m per month. Having increased by 1.2% Y-o-Y, rents are still up on an annual basis although at a much slower pace than the 10-year average annual growth rate of 3.9%

Rents for properties located in the CBD decreased by 0.3% Q-o-Q. For all 3 sub-districts tracked, the average asking rent is down from the previous quarter. Only Ploenchit – Chidlom – Wireless experienced a negative rental growth rate on an annual basis, with the average asking rent having declined by 0.7% from Q3 2019. The average asking rent outside the CBD fell by 0.1% Q-o-Q. Rents in the Petchburi – Rama IX – Ratchadaphisek

area increased by 1.0% Q-o-Q and 2.3% Y-o-Y, making the sub-market the only area with positive rental growth across both metrics. Coincidentally, the sub-market is also the only one with an occupancy rate still above 90%. However, the 2.2% point drop in occupancy in this quarter suggests that the area is facing increasing downward pressure and that positive rental growth may not be sustainable going forward.

A B C Market

1,200

1,100

1,000

900

800

700

600

500

400

300Q3 2012Q3 2011 Q3 2013 Q3 2014 Q3 2015 Q3 2016 Q3 2017 Q3 2018 Q3 2019 Q3 2020

482

794

815

1,127

FIGURE 6BANGKOK OFFICE AVERAGE ASKING RENT BY GRADEBAHT PER SQ M PER MONTH


10 Yr. AnnualGrowth Rate

4.4%

3.9%

(Y-o-Y)

2.8%

1.2%Market

Grade A

(Q-o-Q)

0.7%

0.3%

Q3 2020

1,127

4.2%0.2%Grade B 0.2%815

4.1%1.3%Grade C 1.6%482

794

Rent % Change

TABLE 1BANGKOK OFFICE AVERAGE ASKING RENT BY GRADEBAHT PER SQ M PER MONTH


OccupancyRate (%)

(Q-o-Q)AverageAsking Rent

(Y-o-Y) (Y-o-Y)(Q-o-Q)

Rent % Change Occupancy % Change

1.8%905 88% 1.3%0.3% 4.5%CBD

1,077 0.7% 90% 1.3%0.1% 3.8%Ploenchit - Chidlom - Wireless

898 2.8% 91% 1.0%0.6% 4.5%Nana - Asoke - Phrompong

Area

1.0%883 90% 1.5%0.7% 1.7%Silom - Sathorn - Rama IV

708Petchburi - Rama IX - Ratchada 2.3% 90% 2.2%1.0% 3.7%

0.6%Non - CBD 643 84% 1.4%0.1% 4.9%

Bangna 0.1%575 75% 0.3%1.0% 0.1%690Paholyothin - Viphavadi 3.4% 84% 1.1%0.8% 8.0%

TABLE 2BANGKOK OFFICE SUB - MARKET INDICATORS


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Rental Growth AcceleratingRental Decline SlowingRental Decline AcceleratingRental Growth Slowing

BANGKOK

Hyper – Supply Recession RecoveryExpansion

OFFICE MARKET Rising occu

pancy

Falling occupancy

Rising occupancy

FIGURE 7BANGKOK OFFICE RENTAL CYCLE


REVIEW & OUTLOOK

In continuation from Q2, a greater number of firms decreased their real estate expenditures either by surrendering some space back to the landlord, seeking sub-tenants or by relocating to a different property. This is reflected by the decade low level of net absorption. As we noted in our previous report, relocation is a costly capital expenditure and so space reduction is likely to be the preferred option for most occupiers under financial constraints, unless they can find fitted out space that supports their operations at an attractive rate. One solution that has started to emerge is the sub-letting of office space that has been fully fitted with flexible lease terms and at competitive rates. However, it remains to be seen

whether this becomes a widely adopted practice in a market that has been highly resistant to the practice in the past. While sub-letting can help landlords maintain steady rental income during economic slowdown, the practice can become a double-edged sword if it results in greater competition to attract tenants between existing office space and sub-lettable space. It may also lead to the rise in ‘shadow space’ (a portion of leased space not utilized by the tenant) which obscures the true market occupancy level.

As the effects of COVID-19 and a subdued economy became even more pronounced in Q3, the Bangkok Office market continued to move away from

its cyclical peak. We are now seeing signs of both falling occupancy and rental decline which will progressively shift the market equilibrium away from landlords and towards tenants. For the remainder of the year, the market will likely remain balanced. A tenant favoring market may emerge from 2021 onwards given the relatively large supply pipeline, especially during the upcoming 3 years. Landlords will have to compete on both rent and non-monetary incentives to secure tenants with heavier emphasis placed on incentives that prioritize health, safety and being.

Q4 2020

2021 Landlord

2023 Landlord

2023 Landlord

Landlord

Balanced

Balanced

Balanced

Balanced

Tenant

Tenant

Tenant

Tenant

FIGURE 8BANGKOK OFFICE MARKET BALANCE PROJECTION


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NOTE: ALL FIGURES EXCLUDE MULTI-OWNER, OCCUPIED PREMISES AND OFFICE BUILDINGS WITH A TOTAL LEASABLE AREA OF LESS THAN 5,000 SQ M.

GLOSSARY

Central Business District (CBD)The CBD is the region in Bangkok which contains the greatest concentration of Grade A office buildings, 5-star hotels and luxury shopping malls. Areas within the CBD are easily accessible via mass transit systems.

Grade A Buildings By virtue of their desirability, these prime properties command the highest rents in their market (top 20%). You will find them located in the Central Business District, within 500m of a mass transit station, and have a floor plate of at least 1,000 sq m.

Grade B Buildings Is the largest sector of the office market, these are the buildings that are traditionally in the greatest demand, they might not be the most expensive properties in the market but represent good value for money.

Grade C Buildings Typically older properties, these buildings provide office space for rent at the most competitive rents in the market (bottom 40%).

Take Up Measures the total amount of previously available space and new supply now leased by tenants during a given period of time. It does not account for the amount of space vacated by tenants. It is an indicator for the amount of new leasing activity that has occurred.

Space Vacated Measures the total amount of space vacated and not re-let during a given period of time.

Net AbsorptionMeasures the change in occupied space during a given period of time. In other words, it is the total amount of space leased minus the total amount of space vacated by tenants. Net absorption indicates the change in demand relative to the current supply available in the market.

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We like questions, if you’ve got one about our research, or would like some property advice, we would love to hear from you.

MARCUS BURTENSHAWExecutive Director, Head of Occupier Services and Commercial Agency

+66 (0)2643 8223 Ext 104

[email protected]

PANYA JENKITVATHANALERTExecutive Director, Head of Office Agency

+66 (0)2643 8223 Ext 230

[email protected]

PHANOM KANJANATHIEMTHAOManaging Director

+66 (0)2643 8223 Ext 124

[email protected]

NATTHA KAHAPANADeputy Managing Director & Head of Phuket Operation

+66 (0)2643 8223 Ext 300

[email protected]

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