Mr. Marcus Burtenshaw, Executive Director and Head of Occupier Services and Commercial Agency (OSCA), Knight Frank Thailand, said that “Now that more companies allow their staff to “work from anywhere” the amount of empty desks in Bangkok’s office buildings is growing. This surplus space is sometimes known in the industry by the ominous sounding term: “Shadow Space”. Shadow Space can be thought of as a market’s hidden vacancy rate. Tenants typically cannot return their surplus space before the end of their lease term, unless they can find a replacement tenant. So tenants with surplus space can find themselves in the position of competing with their landlords for new tenants.
So how much Shadow Space is there in Bangkok? Well, the amount of this unused or under-utilised space can be difficult to measure. To the landlord that space is still leased and they are still receiving income, so those empty desks are not counted in a building’s vacancy rate. But what we do know is that even officially recorded occupancy rates are falling. So as new supply enters the market, the impact that Shadow Space could have on this growing dynamic could be significant”.
Office Property Market Indicators
Economic Overview
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 fell 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 fifth 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.
Supply
Based on Knight Frank Thailand Research, 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.
Figure 1
Bangkok Office Supply
Sq m
Future Supply
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.
Figure 2
Bangkok Office Future Supply
Sq m
Demand
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, 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.
Figure 3
Bangkok Office Supply – Demand Dynamics
Sq m
Figure 4
Bangkok Office Occupancy Rate by Grade
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.
Figure 5
Bangkok Office Average Asking Rent by Grade
Baht per sq m per month
Table 1
Bangkok Office Sub – Market Indicators
Review and 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.
Figure 6
Bangkok Office Rental Cycle
