In the post-pandemic era, has the commercial real estate market come to a turning point while facing changes in corporate office demand ? （Part Two）
Please scroll down the page for English article
For commercial building owners, does the transformation mean a potential crisis or an opportunity?
Although the employees are gradually returning to office with the pandemic easing, the shift in work patterns has still been affecting the demand in the office market. With 12% of the offices in the world still vacant, far higher than the pre-pandemic rate of 8% (Ref 15), the crisis that the commercial building owners are facing has not been totally averted even though the pandemic is easing. In the following, we will further discuss the crisis faced by commercial building owners in major cities both overseas and in Taiwan. Also, we will provide suggestions on how to turn the potential crisis into an opportunity.
Crises Faced by Foreign Commercial Building Owners
The slowdown of the pandemic does not mean that the crisis of the change in needs for office spaces will dissipate, as the commercial office markets in New York, London, and Tokyo, where economic activities are highly concentrated, still encounter the rising vacancy rates (Ref 15).
According to the data in 2021 from real estate service consultants, New York’s office vacancy rate reached 18.6% in Q2, much higher than the 15.2% vacancy rate at the end of 2020 (Ref 16); London’s office vacancy rate rise to 7.9% in Q4 (Ref 17), while Tokyo’s vacancy rate ran up to 6.38% in Q4 (Ref 18). From the above data, it is obvious that commercial building owners in these three capital cities are facing higher vacancy rates than they were before the pandemic.
The key behind such phenomenon derives from the adoption of hybrid work style by companies in technologies and software industries transforming the demand for office spaces. Therefore, companies are downsizing their office spaces, as well as not renewing their leases, or even subleasing their office spaces to other tenants. At the same time, their need for office spaces has shifted to those much more flexible, such as satellite offices or coworking spaces.
Furthermore, owners of dated commercial buildings are encountering greater challenges than those having newer commercial buildings. In order to adopt the hybrid work mode, companies less affected by the pandemic are seeking more flexible and high-quality offices. For instance, among the U.S. rising leasing activities, 65% of transactions are from new office buildings, with its vacancy rates lower than those old ones, just as shown in the image below (Ref 19).
London is also facing the same situation. Since the pandemic outbreak, about 50% of office spaces released by tenants have been secondary ones, indicating that tenants have been looking for better quality office spaces (Ref 20). As for Tokyo in Japan, it has been facing a severe oversupply situation, with vacancy rates expected to climb further from year 2023 to year 2025. Under the oversupply scenario, office buildings, especially for the old ones, have to make changes to meet tenants’ new demands in the post-pandemic era, such as planning office space in accordance with the WELL building standard and incorporating relevant anti-pandemic equipment to maintain tenant’s health (Ref 21).
圖片來源： Bloomberg 文章資料 （註19）
In short, the rise in vacancy rates does not mean that the commercial office market has come to an end, but rather is an alert of a clear shift in tenants’ demands for office spaces during the post-pandemic era. At this moment, owners of commercial office buildings are no longer able to compete on price to attract tenants in the market; instead, they need to adjust their traditional asset management strategies to deal with such potential crises.
Taiwan Commercial Office Market Outlook
Compared to the foreign office market, Taiwan’s commercial office market has not been severely affected, but rather has grown against the trend. According to 2021 Q4 CBRE’s Taipei Office Outlook Report (Ref 22), we can see from the chart below that Taipei office spaces have not been influenced by the pandemic; instead, the vacancy rates were declining to new lows and rents grew steadily, especially for Grade A offices in higher quality. The two main reasons for such a phenomenon are as follows.
Compared to foreign countries, Taiwan’s economy was less affected by the pandemic, enabling most industries to recover quickly and having less impact on the commercial office market.
The returning investment capital of Taiwan’s companies and the expansion of tech companies have created vast demand for office spaces. Nonetheless, the supply of office spaces has been greatly reduced, for most of the old office buildings are under urban renewal,as well as renovation, or even new office buildings have already been pre-leased or self-occupied. As a result, when the supply could not meet the demand, the vacancy rate keeps declining and the rent continues increasing.
在商辦市場狀況看好的情況下，台灣的業主是否就無須做出任何改變? 其實不然, 若業主不隨後疫情時代的趨勢轉變，可能將在2024年後面臨商辦市場供過於求的危機時，遭受嚴重衝擊。根據各家商用不動產顧問公司研究指出（註23），每年台北市的租賃平均去化量約30,000坪，但未來5年台北整體商辦的新供給高達約837,000坪，其中預估以台北市中心釋出318,955坪與南港區的400,513坪為主要的供給，而這樣的供給量市場需約相當長的時間才能完全去化。屆時，空置率會因商辦新供給湧現而上升並對租金造成壓力，而市場的主導權也將從原本的商辦業主，移轉到租戶手上，業主必須與眾多供給者互相競爭租戶。
With the positive signs of the commercial office market, do the landlords in Taiwan need to make any change? In fact, it may still be necessary. If landlords do not follow the post-pandemic trend to make changes, they might be severely impacted by the crisis of oversupply in the commercial office market after 2024. According to a study conducted by various commercial real estate consultants (Ref 23), the average amount of leasing in Taipei City is about 99,174 square meter per year; however, the overall new supply of Taipei commercial office space in the next five years will amount to 830,000 ping (2,766,000 square meters) office space, of which 318,955 ping (1,054,400,000 square meter) released from Taipei City Center and 400,513 ping (1,324,000 square meter) from Nangang District. It will take a long time for such supply to be absorbed in the market and the vacancy rate will rise due to the emergence of new office space supply and impose more pressure on rents, thus a tenant favoured market. In other words, the landlords need to compete with many other landlords for the same pool of tenants.
In brief, although the commercial office market in Taiwan has been steadily developing despite the pandemic outbreak, it still needs to face the oversupply situation after year 2024, as well as the transformation in corporate office demand mentioned above, including the pursuit of more resilient office spaces and more emphasis on safer working environment for employees in office. By doing so, the landlords need to catch up with the tenants’ ever growing requirements for office spaces and become their best choice in spite of the large supply of new buildings.
How Can Commercial Office Landlords React to The Crisis?
When facing a similar crisis, how could commercial office landlords react? The following will provide four practicable solutions for reference.
Provide a Health-oriented Office Environment
As mentioned in the second turning point, the WELL building standard has become a key consideration for companies leasing offices, and through necessary proportioned capital expenditures on getting buildings equipped with items like better ventilation and illumination are able to attract more tenants (Ref 24).
Therefore, if landlords want to elevate their asset value, they can plan their office spaces in accordance with the WELL building standards and introduce related anti-pandemic measures, such as intelligent air purifier, automatic UV sterilization lamps, and also the Emotion Recognition using Wireless Signals（EQR）, to replace conventional punch clock and also perform multiple functions, like face recognition, intelligent temperature detection, mask detection, as well as access control authority management (Ref 25). In this way, pandemic prevention measures in the workplace can be thoroughly implemented, allowing companies to provide a safer and more secure office environment for their employees, as well as reducing the risk of infection, to maintain company operation stable.
Diversified Tenant Strategy
With the pandemic outbreak, landlords may not be affected if they have only one or two anchor tenants, but they may not want to rule out the risk of their anchor tenants exiting the lease. Therefore, landlords can adopt a diversified tenant strategy to avert the risk, as not all industry sectors will be impacted by the pandemic, but rather growing against the odds, such as the technology and insurance sectors. According to the 2021 Q4 data from real estate consulting firms, the technology sector continues to be the most significant rental demand driver of office spaces in the U.S. (Ref 26), the U.K. (Ref 27), and Japan (Ref 28), respectively accounting for 21%, 30%, and 27.6% of total leasing activities.
In other words, landlords can target tenants from different industry sectors in the future to reduce systematic risks when it happens, such as the financial crisis and pandemic. In addition to setting flexible lease terms, landlords should also make changes depending on different tenants’ needs for office spaces, such as allowing tenants to to quickly turn around a low-density or partitioned workspaces for technology companies with a large number of employees to meet the needs of pandemic prevention. By doing so, landlords can retain existing tenants and attract new ones to ensure minimal impact from the pandemic. Nevertheless, if landlords do not make any change, their asset may be left idle for a long time due to a lack of tenants, resulting in a great loss of asset value.
Asset Revitalization Strategy
Some self-occupied buildings, having suffered from severe losses due to the pandemic, can adopt a more aggressive asset revitalization strategy, such as the sale-leaseback method. For instance, JTB, the largest Japanese travel agency, sold its headquarters in Tokyo and a building in Osaka on September 14 in 2021 to support its financial position (Ref 29), as it had recognized a loss of approximately 105.2 billion yen by the end of March in 2021 due to the severe impact of the pandemic.
The Apex Group in Japan has also sold its headquarter in Tokyo on December 28, 2020 for 70 billion yen through the sale-leaseback transaction (Ref 30), as it had been hit hard by the pandemic and had already recognized a loss of 3.2 billion yen from April to September in 2020. Through asset revitalization strategy, the landlords have the flexibility to convert existing fixed assets into liquid capital, which will alleviate their current capital shortage and provide sufficient capital to face the complex changes in the business environment.
商辦業主可打造複合型商辦大樓，不僅能滿足企業對辦公室彈性需求，又可將每層空間效益最大化，進而提升資產價值。舉例來說，在疫情時間，台北101辦公大樓以及商場融入新型態複合式空間「SKY PARK」以及 AMBI Space One透過打造垂直社區，藉此深化與租戶生活的連結。因此，新租戶租金漲幅約2～3成，而其中最高價樓層租金已衝破5,000元，高於信義區平均行情甚多。由此可見，透過複合大樓的概念，商辦業主可透過結合不同空間所產生的商業效益，增加資產價值（註31）。
Commercial office landlords can create mixed-use buildings that only satisfy companies’ needs for flexible office spaces, but also maximize the space efficiency of each floor, thereby increasing the asset value. For instance, during the pandemic, Taipei 101 office building and its shopping mall incorporated a new type of mixed-use space, SKY PARK and AMBI Space One, to deepen the connections with tenants’ daily life through creating a vertical community. Inevitably, such addition of building facility has further maintained its premium rent level and stable occupancy rate in Xinyi District. This indicates that through the concept of mixed-use building, commercial office landlords can increase the value of their assets through generating their business benefits coming from different space usuage (Ref 31).
Concusions and Suggestions
In the post-pandemic era, is the commercial real estate market facing a change in corporate office demand, i.e., a crisis or an opportunity? In summary, we consider that the change is both a crisis and a chance, as the pandemic outbreak has just accelerated the change that the commercial real estate market will eventually face.
If commercial real estate owners continue to stick to the conventional concept of “sitting back and waiting to collect rent”, and only compete on price to attract tenants, or even unwilling to adapt their office space to meeting the changing needs of different tenants, they will eventually face the crisis of rising vacancy rates. Landlords who own older office buildings will face a greater impact. For those who are unwilling to make changes in the face of these crises, will pay a heavy price for the lack of tenants or the declining rental income.
On the contrary, if landlords can change their mindset and proactively adopt more flexible strategies and measures to cope with the transformations, such as providing health-oriented office spaces, diversifying tenant and asset revitalization strategies, and creating mixed-use building to satisfy the needs of companies in the post-pandemic era, it is highly possible that landlords will turn this change in demand from a crisis into an opportunity to ride the trend and increase their asset value.
照片來源：People in Law 文章資料（註14）
# 不動產產品定位 # 資產價值最大化