Office merry-go-round strikes as tenants deal with adversity

July 30, 2020 | 10:00
After devastating retail and hospitality sectors in the real estate market, the COVID-19 pandemic has expanded its negative impact to offices for lease, where many tenants are narrowing their spaces or moving to lower grades.
1502p22 office merry go round strikes as tenants deal with adversity
Some groups are looking towards coworking spaces in an attempt to continue their operations on a smaller scale, photo Le Toan

Creating a startup agency for airlines tickets and tours three years ago, 32-year-old Nguyen Manh Hao is now struggling to rescue his business.

Hao and two friends set up a joint-stock company and with confidence rented a Grade C office for lease in Happy Tower, in District 3 of Ho Chi Minh City, at the price of $11 per square metre.

Hao’s company is paying $890 excluding other charges such as parking, management, power and water supply, for the 90sq.m office space every month. In addition, Hao also paid a sum of VND200 million ($9,560) for fitting and equipment installation.

The above expenses are not big for doing business in general but are significant for startup investors like Hao and his friends. Strongly impacted by COVID-19 since the beginning of the year, Hao and his company can no longer afford the costs. He has recently decided to narrow the space by half, hoping the company can survive the pandemic. “I really do not know how long we can stay afloat in this situation,” Hao said.

His situation is a familiar story of small businesses which are struggling with the downturn in the market caused by COVID-19.

According to figures released by the General Statistics Office under the Ministry of Planning and Investment, more than 92,200 enterprises had to withdraw from the market in the first six months of this year, an increase of 38.2 per cent compared to the same period of last year.

Accompanying this number was the increase of vacant space in offices for lease, especially Grade C which is mostly occupied by small and private companies.

Difficulties increase

The latest report from JLL Vietnam said that a number of buildings recorded negative net absorption in the second quarter of 2020 in Ho Chi Minh City as tenants in financial hardship returned the spaces.

The combination resulted in an increase of overall vacancy in the Grade A and B market by 107 per cent on-quarter in the second quarter, even though the market remained tight with only 8.0 per cent vacant space.

Negative net absorption was recorded for the first time in a decade, registering -3,619sq.m in the second quarter. This was mainly due to small- and medium-sized enterprises (SMEs) that were major sources of tenants in the Grade B market, scaling down and terminating contracts as a result of the pandemic and its impacts.

The Grade A segment, albeit more resilient and backed up by deep-pocketed companies, was also under pressure due to a collapse in demand.

Buildings with increasingly large vacancies, especially in lower grades, will likely reconsider their asking rents and leasing strategies to maintain the required occupancy rate as the pandemic rumbles on.

Meanwhile in Hanoi, a similar situation was apparent during the second quarter as negative net absorption was recorded in both grades A and B. This led to a 37 per cent rise in vacancy rates on-quarter, although the market remained tight with only 7 per cent of space vacant.

According to Trang Bui, head of markets at JLL Vietnam, as the global economy remains uncertain, office tenants will take a hard hit with probably those in grades B and C first and likely followed by those in Grade A if the virus is not globally contained soon.

“Tenants had to either move to locations with lower rents or shrink down their size. In addition, not only SMEs were experiencing difficulties, large corporates are also becoming more cautious in their spending as the global market has been affected heavily by the pandemic,” Trang said.

Aware of the difficulties for tenants, some landlords are actively supporting them by reducing rents or adding more facilities. The developer of MK Centre, a full-package office for lease in Ho Chi Minh City, announced a rent-free period of six months from June for its tenants and a reduction of 25 per cent rent will be applied for the following 12 months.

Meanwhile, Huynh Phuoc Nghia, associate dean at Ho Chi Minh City University of Economics, said reducing rents for offices for lease is a smart solution which can help both tenants and landlords overcome the pandemic. “Landlords can suffer from large vacancies so they will still try to keep their tenants as much as they can, hoping that the worst will soon be over. If tenants survive, landlords survive as well,” Nghia said.

In general, operators of office for lease buildings are reducing their rents from $5 to $1 per sq.m per month.

Many companies have been moving to a lower grade of office. According to CBRE Vietnam, in the second quarter, 72 per cent of CBRE Vietnam’s enquires involved moving from Grade A to B or from B to C. Tenants, therefore, are tending to narrow their space and move to lower grade buildings in non-centre district areas to save their budget.

Coworking alternative

As companies look for alternative options in order to save costs, coworking spaces are being considered by many, including multinationals, thanks to their competitive and versatile offerings.

Unlike traditional office buildings which require high investment from the beginning, coworking spaces are an alternative option for many companies where they can have a space for working with reasonable rents but are flexible and equipped with facilities. This option is especially suitable for SMEs and startups.

With the advantage of low rent costs and deposits, coworking spaces are attracting more tenants. Moreover, they will not have to depend on long-term contracts.

Coworking spaces have been increasing recently with more than 40 operators in Hanoi and Ho Chi Minh City including Regus, Toong, Up, NakedHub, WeWork, CoGo, and Tiktak.

According to Duong Do, founder and CEO of Toong, it is a tough time for everyone as the outbreak is curtailing economic activity. However, Toong is diversifying its activities to woo customers. “Toong has inevitably experienced a decline in revenue growth in March; however, the majority of our clientele are medium and large companies with long-term goals and business continuity plans, which makes it harder to be shut down or come to a complete halt,” Duong said.

With six new locations soon to come online and a three-month art project taking place across 11 locations, the summer of 2020 is a milestone for Toong. Funded by Indochina Capital in 2017, Toong was Vietnam’s first professional large-scale coworking brand, becoming one of the key shareholders and holding a board position in the startup company. So far it has 19 locations nationwide in Hanoi, Ho Chi Minh City, Nha Trang, and Danang.

“Although the complicated movements in the world are changing the way the economy operates, we believe that in a challenged context, flexibility is the key for businesses to quickly adapt. The dedication of the service provider is still a key to open up new opportunities,” Duong said.

Talking with VIR, WeWork head of growth in Southeast Asia and South Korea Ray Tan admitted that it is of no doubt that offices for lease and coworking spaces have been significantly affected by events this year. “This is not the first time we had to deal with adverse economic scenarios. When we first started 10 years ago, it was just after the height of a financial crisis. Akin to now, it was a time when the economy was on track to recover and companies were re-evaluating their business strategies. Companies will always value our flexibility, cost efficiency, and shorter lease lengths, especially more so in a recessionary environment,” said Tan.

Between March and July, WeWork have seen a more than 13 per cent increase since the start of the year in the Vietnamese market. WeWork has three locations in Vietnam, all located in Ho Chi Minh City.

“Southeast Asia is still in its infancy when it comes to space-as-a-service providers like WeWork. It currently only makes up 5 per cent of total office space in the region and looks to increase to 30 per cent in a decade,” Tan replied when he was asked on the possibility of changing investment strategies for Vietnam’s market.

“We are seeing optimism that Vietnam will rebound strongly from the current economic slowdown. So, we are very committed to the market and our strategy is to build the right model to ensure smart and sustainable growth,” he added.

By Bich Ngoc

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