The high office vacancy rate raises questions about the future of large large floor plate office buildings
Due to economic difficulties in 2023, many businesses have had to downsize their office spaces. The increasing supply and decreasing demand are shifting the dynamics in office leasing transactions, with tenants gaining more control. What lies ahead for the office market? Which large large floor plate office buildings will be attractive options for businesses looking to relocate? Let’s explore this in the following article.
The wave of office downsizing
The trend of downsizing office spaces post-Covid-19
Before the COVID-19 pandemic, optimistic forecasts about a thriving economy in Vietnam, coupled with numerous startups in various sectors, indicated a bright future for the office market. At that time, market research reports consistently recorded the growth of the office leasing market.
However, after COVID-19, due to economic setbacks, many businesses either returned or downsized their office spaces to save operational costs. Large floor plate office buildings saw increased vacancies as businesses tended to move their offices to non-central locations for cost optimization.
This shift occurred as numerous startups, and even large enterprises, had to exit the market during and after COVID-19. Operating businesses also hesitated, postponing plans for expansion and company development during this period. Combined with relocations and downsizing of office spaces in Hanoi and Ho Chi Minh City, the vacancy rate for offices with available space is currently ranging from 25-40%.
Office buildings with extensive floor space are encountering a significant vacancy rate in Hanoi and Ho Chi Minh City
In the ‘Report on the Results of the Survey on the Situation of 10,000 Domestic Enterprises,’ released by the Private Economic Development Research Board in mid-2023, over 82% of businesses are expected to continue reducing their scale, temporarily pause, or cease operations in 2023. Among the businesses remaining in the market, more than 70% plan to decrease their workforce by 5%, and over 80% anticipate a decrease of more than 5% in revenue. Various domestic and global factors, such as declining order volumes, difficulty in accessing loans, and challenges in meeting legal requirements, contribute to the current predicament faced by businesses.
The cost of renting large offices in central areas is causing many businesses to face difficulties
“Mr. Tran Tuan Thien, the owner of a technology startup in Hanoi, commenced operations in 2020. By 2022, observing the post-COVID-19 recovery and numerous incentives from the lessor, he moved his office from a coworking space in Thai Ha (Dong Da, Hanoi) to a building on Tran Hung Dao Street (Hoan Kiem). However, in 2023, the landlord began reducing incentives, raising the rent again. The high rent prompted him to relocate the office to an apartment in My Dinh after the contract expired in June 2023. Mr. Thien stated that economic difficulties since late 2022, coupled with a 50 million VND/month rent increase, made it unsustainable, leading to the decision to move the office.
In Ho Chi Minh City, Ms. Ly Phuong Linh, involved in a startup project for booking accommodations for foreign tourists visiting Vietnam, also decided to leave the market after 2 years of stagnation in tourism due to the pandemic. Ms. Ly returned to the office in Thu Duc as the business’s activities were ineffective.
See more: Learn about Grade A quality office space for rent in the Hi-Tech Park
A few businesses are developing and expanding their operations
However, not all businesses are engulfed in the economic downturn. Fundiin, a startup providing buy-now-pay-later services, is an example. Fundiin returned the premises on Nguyen Trai Street (District 5, Ho Chi Minh City), the workplace for 30 employees, to move to a new office with space for 80 employees. The office space increased from 145m2 to 390m2. This reflects the company’s successful development and future business expansion needs.”
A few businesses are still “swimming upstream” in the bleak economic situation
Mr. Nguyen Anh Cuong, CEO of Fundiin, shared that the company relocated its office with a moderate increase in rent, but the new large-floor office building helps create professionalism and provides space as Fundiin expands its workforce. The company’s leadership team has planned to expand its operations and double its workforce in 2023.
Current Situation in the First Half of 2023
Hoang Nguyet Mai, Senior Director of the Commercial Leasing Department at Savills Hanoi, mentioned that the demand for office rentals primarily comes from information technology, legal consulting, and financial businesses. However, start-ups tend to slow down or return office spaces. The occupancy rate and office prices in Hanoi are fluctuating due to an abundant supply, while demand for office rentals is decreasing.
According to the report from Cushman & Wakefield Vietnam, in Q2/2023, Waterfront Tower officially entered the market, contributing over 6,000m2 of large-floor office space in Ho Chi Minh City. Meanwhile, the trend of returning office spaces continues. It can be seen that both Hanoi and Ho Chi Minh City face similar challenges as the supply increases while the demand from businesses decreases. Data also indicates that in the first six months of 2023, 90% of the leased office space was returned by real estate, technology, and banking businesses.
Many businesses had to close during and after the COVID-19 pandemic
Also in Q2/2023, the net absorption volume is estimated to be negative at 4,500m2. Over 70% of these transactions involve returning or relocating offices in the central area. The central area is most affected by the wave of returning office spaces due to high rental prices and the concentration of many businesses. Sub-central areas have seen increased relocation activities due to lower rental rates, making it easier to access the central areas.
Tenant Empowerment
In 2022, the limited supply of office spaces for rent turned the office market into a playground controlled by landlords. Tenants often had to accept high prices along with strict regulations during the office usage process. However, by mid-2023, with the significant increase in the supply of office spaces and a reduction in rental demand, the tide has turned. Currently, new tenants have more leverage in negotiating office rentals.
The clearest evidence that landlords are now more accommodating is the trend of decreasing office rental prices. CBRE Vietnam’s survey shows that office prices began to decline in Q4/2022, and the survey predicts that the vacancy rate for Grade A offices in 2023 will be around 22%, along with a 4% decrease in rental prices. As of mid-2023, the current average rental price for Grade A large floor office space in Ho Chi Minh City is $45.6/m2, a 0.7% decrease compared to Q1/2023. Grade B offices also decreased by 1.2% compared to the same period in 2022, with an average rental price of $25.6/m2.
Tenants are gradually taking the initiative in the office market
Although tenants currently have an advantage in negotiations, most businesses still face economic challenges. Many businesses have chosen to reduce office space or move to cheaper locations. Some even return the entire premises. Even some financially stable businesses choose the safe option of renewing their existing leases, waiting for positive economic signals to expand in the near future.
According to a report by Savills Vietnam, the supply and demand of the office rental market are trending towards the outskirts of central districts. With office prices ranging from $15-20/m2/month, these suburban areas have an occupancy rate of up to 9%. A typical example is the OneHub Saigon project in the Ho Chi Minh City High-Tech Park, which is a notable Grade A office project outside the city center with affordable rent, high-quality buildings, and good connectivity.
It can be seen that the market is in a ‘tug-of-war’ phase, where both landlords and tenants face their own difficulties. For landlords, reducing demands and rental prices is a good way for both parties to benefit during these challenging times.
See more: Reasons foreign businesses should invest in Vietnam
Is There a Future for Large Floor Office Buildings?
According to CBRE, there will be six office buildings with a total area of up to 170,000m2 entering the market in 2023. Ms. Hoang Nguyet Minh believes that despite market fluctuations, investing in office rentals remains an attractive investment area, especially for investors or owners with strong financial capabilities and a desire to build a brand. However, she also notes the limitations of the office rental segment, which is less flexible in expanding locations and relies heavily on service complexes and infrastructure around the office area.
Furthermore, the difference in tenants creates different office occupancy rates. In cities such as Delhi, Mumbai (India), Ho Chi Minh City, and Hanoi, some rapidly developing industries such as finance and business services have recorded a strong demand for office rentals. Savills Impact forecasts that the added value from these businesses is expected to increase by over 50% in the next 5 years.”
Offices are still a good investment for investors with strong potential
For tenants with strong financial capabilities, expanding the office scale in large-floor office buildings must go hand in hand with accessing quality resources. Tenants may leave the city center area, but a good location that is easily accessible to resources remains a prioritized criterion. Currently, high-quality office projects located too far from the city center, despite their good quality, still have low leasing rates and slow growth.
In terms of trends, high-quality and green-standard offices will become a significant demand, as many businesses and corporations are aiming for Net Zero goals and committing to reducing carbon emissions, as well as complying with ESG standards. This will be an inevitable trend that investors need to adapt to and seize to effectively attract customers.
OneHub Saigon – A project offering large-floor office buildings with great potential in East Saigon
OneHub Saigon is a prominent office project in Thu Duc City and the East Saigon area. With many outstanding advantages such as affordable rent, only 1/3 compared to central areas, convenient transportation connectivity, and modern Grade A large floor office buildings with LEED green office certification. Additionally, OneHub Saigon is close to the Ho Chi Minh City National University Village and many high-quality universities, promising to provide abundant high-quality talent supply for businesses here.
Large floor plate office building Tower 1 at OneHub Saigon
Inside the large floor office buildings at OneHub Saigon are virtually column-free spaces, offering excellent natural light and high ceilings of 3 meters, creating a spacious and comfortable working environment. Not to mention the ability to optimize space effectively, providing various solutions based on current and future business needs. It can be said that this is a highly potential choice for many business requirements. From businesses intending to relocate offices to reduce costs while maintaining a high-quality office to those looking to expand their scale in an area with good connectivity, OneHub Saigon is a versatile solution.
Column-free floors and 3-meter-high ceilings at OneHub Saigon
With a long-term vision, of capturing the future trend of green offices, OneHub Saigon is built in a campus style with many flexible spaces for connecting, socializing, and relaxing for those working here. Alongside this are numerous green areas and outdoor sports facilities, an advantage that many offices in the central area of Ho Chi Minh City cannot have due to limited land resources.
In summary, OneHub Saigon is a potential office project with many advantages suitable for businesses looking to expand or find ways to save operational costs.
Conclusion
2023 continues to be a challenging economic year, with many businesses seeking ways to optimize operational costs. Options such as downsizing, relocating, or returning office spaces are being widely chosen. Many large floor office buildings have high vacancy rates despite reduced leasing prices; however, tenants are somewhat more proactive in office leasing transactions.
OneHub Saigon is a promising office project and a good option for businesses looking to expand or relocate offices. With numerous advantages in cost, quality, connectivity, and green office criteria, it is a high-quality office project that many businesses are seeking.
