June 11, 2009
Idle office space casts shadow on rents
Tenants who cut losses by subletting are affecting rates
By Joyce Teo
SOMEWHERE in the Central Business District lies a skyscraper with floors of idle office space on offer, and it is not even officially on the rental market.
This is called 'shadow space' - office space that technically has been leased out to a tenant, except that that tenant now wants to sublet it to someone else because he has too much of it.
More and more companies, particularly financial institutions, are looking to sublet 'shadow space', according to a new Colliers International study.
Many have shelved expansion plans or scaled down operations in light of the current economic crisis, and do not want to keep paying rent for space that they no longer need.
Colliers estimated that 'shadow space' rose another 48 per cent from an estimated 250,000 sq ft in March to 370,000 sq ft last month. That is equivalent to the size of the 30-storey MAS Building in Shenton Way.
While it may represent only 0.5 per cent of Singapore's islandwide office stock, it is about 15 per cent of the 2.5 million sq ft of new office space expected to come onstream this year.
And the number is still growing.
This unexpected overhang of excess space could delay an anticipated recovery in office rents, said Colliers.
Some 42 per cent of the space is in the Raffles Place and Marina Bay area, with 24 per cent in the Marina and City Hall area and the remainder in the Shenton Way and Tanjong Pagar areas.
Nearly half of all the 'shadow space' currently being marketed is offered by financial institutions, which went through an explosive growth period earlier but were among the first to downsize their operations in the downturn. Citibank is among those with idle space - at buildings such as Millenia Tower, Centennial Tower and Capital Square.
The information technology and marine/offshore industries are the next two largest contributors of 'shadow space'. So far, the fast-growing 'shadow space' in the market has added to the competition for tenants and exacerbated downward pressure on rents.
'Corporates are looking at offloading such space as soon as possible so they need to be more attractive rental-wise,' said Cushman and Wakefield managing director Donald Han. Rents for 'shadow space' can be as much as 20 per cent lower than the committed rental deals for usual office space, he noted.
That is because there are typically more restrictions associated with 'shadow space', even though the pros include a fitted-out space. For example, the remaining lease of such space may be two years, shorter than the typical three-year lease.
'The tenant's agenda is to mitigate their loss by subletting the idle space,' said Knight Frank director of business space (office) Agnes Tay. 'Depending on how much they are willing to cut their losses and when they signed the lease, the discounts can be as low as 10 per cent or as high as 50 per cent,' she added.
As a result, traditional landlords are offering incentives such as rent holidays on top of very competitive closing rents, sometimes 25 per cent to 30 per cent below what they asked for, said Colliers.
Going forward, financial institutions who had pre-committed to large amounts of space in yet-to-be completed offices or business park buildings in the past two years may no longer need so much room.
As the bulk of these buildings - including Marina Bay Financial Centre Phase 1 - will be completed next year, the amount of 'shadow space' could peak then, said Colliers.
And should the global business environment remained challenged, these financial institutions alone will make available an estimated 400,000 to 600,000 sq ft of additional 'shadow space', it said.
The office rental market is already trying to digest a potential supply of 9.6 million sq ft of office space available from this year till 2012.
Grade A office rents are projected to decline by up to 60 per cent this year and 20 per cent next year.
By the end of next year, the average monthly gross rents of Grade A office space in the Raffles Place micro-market could return to the mid-2005 level of just $5 per sq ft (psf) per month, from $10 psf in the first quarter, said Ms Tay Huey Ying, Colliers' director of research and advisory. This, though, would still be above the $3.95 psf seen at the bottom of the market in 2004.
'Shadow space' in numbers
· 'Shadow space' rose by 48 per cent between March and May
· There is a total of about 370,000 sq ft of 'shadow space' today - about the size of MAS Building
· 'Shadow space' usually costs 10 per cent to 50 per cent less than regular space