As more and more occupiers choose to relocate to new, higher-quality office buildings, the average vacancy rate in non-prime buildings across Bangkok stands at 9.7 percent.
Despite the relatively low rate, a number of landlords are choosing to adopt different strategies to ensure competitiveness and retain tenants, according to real estate firm JLL.
“Despite the softened overall economy of Thailand, many business sectors have continued to perform well. This is reflected in buoyant leasing activity in the Bangkok office market where companies have continued to secure more space to accommodate business expansion,” said Suphin Mechuchep, Managing Director of JLL.
“Continued strong demand for prime office space is another example showing companies’ financial strength,” she added.
Yupa Sathienpabayut, Director of Office Leasing at JLL, added: “Recent large leasing transactions in Bangkok are concentrated in prime office buildings, despite higher rents. Many of these transactions are relocations which are contributing to rising vacancies in non-prime grade buildings.”
According to JLL’s Thailand Property Intelligence Centre, the average vacancy level for all grade office space across Bangkok increased to 9.4 percent in the first quarter of this year, from 9.0 percent at the end of 2015. Much of the increase in vacancy is being driven by negative net absorption in non-prime grade buildings, particularly those that have limited or no access to mass transit (e.g., BTS and MRT), which continued to be a major relocation driver for tenants.
JLL’s Thailand Property Intelligence Centre also reported there is currently 8.51 million sqm of office space in Bangkok. Out of this total, 5.54 million sqm is in non-prime grade buildings.
“To retain or increase competitiveness, landlords of non-prime grade buildings have become more flexible when negotiating lease terms with existing and prospective tenants,” said Yupa.
“Some of them offer more incentives such as more parking spaces, an increase in a fixed cap rate on renewal and/or longer rent-free periods for new tenants. However, very few of them have adopted a rental reduction strategy at this point,” she added.
Figures from JLL’s Property Intelligence Centre show in the first quarter of this year average office rents continue to rise across the market, however rental growth in non-prime buildings is decelerating more quickly than in prime buildings as more tenants in these buildings are moving out.
“With the healthy on-going levels of occupier demand for quality space, existing landlords with well-located buildings that are now seen as no longer in demand should start to consider fully refurbishing their buildings and re-releasing a ‘new’ product to a receptive market.
“With demand for new office space likely to remain strong over the next few years, the initial rental income expectations should permit this innovative approach,” added Yupa.
Major office buildings in Bangkok that have recently renovated include both prime and non-prime grade office developments namely CyberWorld Towers, Sindhorn Towers, and GPF Witthayu. Buildings that are currently under renovation include Kian Ngwan Building II, Suntowers and the Vanit Buildings.
Michael Tang, Director of Project and Development Services at JLL, said: “Renovation is generally more favourable to owners of older buildings as compared to a new build option. It is quicker to complete and requires less investment outlay and the building can be put back in the market faster. It also eliminates concerns over limits on land setback restricting maximising site usage to former levels.
“However such a choice is entirely subject to the building in question: how old it is, how well it was designed and built in the first place and how well maintained it has been. Some buildings might have become obsolete and would be subject to rebuilding to modern standards.
“Any renovation will have a shorter lifespan than a new build – hence any budget allocated to refurbishment must be calculated on the intended continuing building life cycle,” he added.
JLL noted that renovations may include minor upgrades such as improvement of security access, vertical transportation, signage visibility, lobby, landscape or restrooms, and/or major upgrades such as changing the entire look of a building.