Local office rents likely to dip as companies apply caution

Central business district rents have had a rollercoaster ride since 1997, when they reached a high of 594 baht a sq m before tumbling as low as 400 baht a sq m with the dramatic impact of the Asian financial crisis.

From 2002 rents began to pick up. They peaked again in 2005 before slipping by 3-5 percent in 2006 and 2007.

In second quarter of 2008 rents stood around 660 baht a sq m, shored up by optimism over the establishment of the Samak Sundaravej government after a general election.

But Jones Lang LaSalle now expects these rents to drop to around 600 baht a sq m in 2009 because the economy is forecast to expand by just 2 percent next year, compared with 4.5 percent this year.

"We had a coup in 2006 and companies didn't have confidence in political stability. In early 2008 we thought things would improve because of bottled up demand. But in the second half we started to see the vacancy rate rise. One reason for this is the new government town, which has increased vacant space in central Bangkok by around 50,000 sq m," said Ms Suphin.

Although the new government town on Chaeng Watthana Road, with 430,000 sq m of space, is not set to fully open until 2009, Ms Suphin said some government units have already started moving there. The administration court has already shifted, freeing up 24,000 sq m in the CBD, and the bankruptcy court is due to follow.

In addition, there are new buildings opening within the central business district, including Asia Center next to The Met on Sathon Road.

"Actually, one of our clients is moving his business operation there early next year," said Ms Suphin.

Jones Lang LaSalle estimates that the total new supply of grade A office space in the heart of the city will be around 200,000 sq m in 2009. This year's take-up rate is expected to be only 110,000 sq m, reflecting how political conflict and the global financial crisis have eroded the 210,000 sq m take-up in 2006.

The downward drift of prime office rents has made Thailand, already cheap compared with some neighbours like Hong Kong and Singapore, even cheaper.

Yupa Sathienpabayut, Jones Lang LaSalle's markets director, pointed out that the rate for similar space in Vietnam is 1,000 baht a square metre.

But the agency expects rates to stabilise at the 600-baht level.

"Right now, it's a tenants' market with landlords doing their best to retain tenants. Once they lose them it's going to be very difficult to fill the space," said Ms Suphin.

When landlords are unable to give discounts they offer better terms. One approach is an escalation cap in the contract, something many did away with when rents rose substantially. This cap is generally 15-30 percent for a three-year term.

Also, with the market in their favour, tenants moving into new offices are securing triple three-year terms rather than just two as was previously the case.

"Right now, tenants are challenging landlords quite a bit because they know next year is going to be a difficult year to do business," she said.

But this looming difficulty also means that companies are generally not eager to move to a new office to avoid the expense of relocation.

Although companies might be expected to consider moving to a grade B office to save costs, Ms Suphin said little such space is available because many firms moved to lower-grade offices in 2005-06, when rents shot up by around 20 percent.

Ms Yupa said some companies opted in the same period to split their operations, keeping a front office in the CBD with a back office elsewhere near to a skytrain or subway station. Both multinational and local firms adopted this strategy to save as much as 40 percent in rent.

She added that the Ratchadaphisek area was becoming more active and popular because rents are lower than in the CBD. Pakin, with around 27,000 sq m, is among the new buildings opening in Ratchadaphisek. It is next to the Yaohan complex and has the area's widest floor space of 3,300 sq m.

"Clients like being on the same floor because it's very good in terms of work productivity. It leads to workers meeting each other more often," she said.

Cyber World, with 61,800 sq m of space, is another new building in Ratchadaphisek. Central Chaeng Watthana, with around 20,000 sq m of space, is a little further off. In the Sukhumvit area, Interchange 21 has make a bit impact. A large insurance company has already moved in and occupied 9,500 sq m.

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