Office tenants go for gold

Alex Crane, leasing manager, office services, CB Richard Ellis, talks about his positive expectations for 2012 and how an Olympian attitude will help office tenants

As we are in 2012, an Olympic year, the excitement of competition comes around once again in its perpetual four-year cycle. Here at CBRE we are sitting in Me Linh Point Tower, aware of one the largest competitions in the world approaching and duly doing warm-ups of our own,albeit in preparation for a different kind competition.

Our preparations aren’t nearly as strenuous as those athletic soles embarking on their chase for victory, but they are as rigorous and as focused at those at the top of their game. Our advice to office tenants is: do the same – winning gold demands it.

The preparations come as the competitive nature of the Olympic Games transcends the 10,000 kilometres between London and Ho Chi Minh City, however, we anticipate it will be some of the office landlords dusting off their running spikes, discus and javelins in a bid to be competitive and hit the finish line first.

I sincerely hope the newly sharpened javelins will not be thrown towards me by the landlords for saying this, but 2012 is looking likely to be a better year for tenants. And before these javelins hurtle through our office windows I feel it is prudent to point out that during 2013 the market could just swing back to parity as quickly as Usain Bolt is expected to run his 100m sprint. Advice to the movers and shakers in 2012, those growing, contracting, approaching expiry or terminations is to take the opportunity before the window closes.

As with any event, the key is in the preparation and accordingly we will look to some figures.  The Ho Chi Minh City office market comprises some 1.8 million sqm with vacancy running at 16.8 per cent or 302,400sqm. Available leasable  space across the Grade A and B sectors within the central business district (CBD) is 105,910sqm and we look to this to act as pacesetter for the wider market.

The pipeline of new supply expected in CBD for 2012 totals approximately 80,000sqm with four excellent developments coming online in President Place (9,100sqm), Times Square (12,700sqm), Saigon One (50,000sqm) and Le Meridien (9,000sqm). It is also worth casting an eye to The Vista on the Hanoi Highway in District 2 adding 9,500sqm of high quality accommodation likely to draw some occupiers from CBD affecting net vacancy in the core of Ho Chi Minh City.

The above figures mean nothing without their favourite sparring partner, absorption, or ‘take-up’. Average absorption for the period 2007 to 2010 was approximately 170,000sqm and it is anticipated 2011 will finish slightly below average at 160,000sqm taking into account the year-to-date figure of 120,000sqm.

If we consider the absorption against availability and new supply, the 2012 market looks as though it will be oversupplied with accommodation and as landlords compete to fill their voids it is likely we will see some attractive terms to tenants in some selective buildings. The most prominent supply coming forward is primarily Grade A quality and pressure on Grade A space will trickle down the Grade scale to classes B and C but will also ripple out of the CBD.  

We are already experiencing some tenants ‘trading up’ from Grade B to A as effective rents soften. It would also seem Carrie and the girls are in town: Sex is “Back” in the City as occupiers that were forced to the peripheral areas in times of high rents are now being attracted back to the CBD as downward pressure on rents takes its toll.   

The year 2012 will not be a ‘no-holds-barred’ event for occupiers.  There will remain landlords and buildings which will hold-up and be more stable as quality generally prevails, established premium buildings are likely to continue to experience good levels of occupancy are likely to be protected.   Of course, they will not be completely immune to any wider softening on rents, but mass exodus by existing tenants is unlikely.  

So where are the hot deals and how do we get them? For fear of javelins this would never be printed, but we are here to offer services to Tenants and of course we can highlight what might be available but I will point out that as in any market – good or bad – it is still about give and take, we must look at the deal in its entirety.

So consider what landlords want besides rent.  Landlords like covenant strength; some will give incentives for alternative payment terms such as six monthly in advance or annually in advance, deposits are typically one quarters rent so perhaps consider your ability to offer a longer deposit.

All of the aforementioned points give the landlord security and often they’ll give you something in return.  Length of the term is also crucial – longer terms will typically get better incentives, as will those taking significant amounts of space. The speed of the deal is also something often overlooked, landlords want your commitment, so if you can move fast again there may be better incentives.

Typical incentives being seen today are built up of rent free periods, stepped rent structures, free or reduced parking and also free/reduced signage; not necessarily always  in the same deal, but it has been done. Tenants can also score in the negotiation of the contract. Flexibility may be built in with termination points, although often with a penalty.

Consider your companies five year plan, think about expansion and contraction; can provisions be made in the lease to accommodate this growth with first rights of refusal on adjacent space or contraction rights to reduce floor area and can similar arrangements be made on your parking provision.    

We’ve highlighted the window of opportunity is open in 2012 so let’s try to see when it will close. The global economy is anyone’s guess, and I am using my word count allotment as an excuse not to tie myself up in knots on that topic. In more basic terms though we can still consider supply versus demand. Beyond the four buildings previously mentioned (plus The Vista in District 2), there is no significant activity on any of the other key sites in CBD. 

Saigon Centre Phase II has broken ground recently, but delivery is still some way off. In fact, we do not anticipate any significant supply being delivered before 2015. As 2012 new supply is soaked up across next year it is possible that the demand to supply ratio balances out in 2013, and usually when this happens rents go one way, no medals for guessing where.

Consider this fact if looking at renewals or relocations in 2012 – can you protect against the bleak period of delivery between 2013 and 2015? Consider the lease structure and any renewal and review patterns.

 We still continue to await significant advances in Vietnamese dong denominated leases, although these are becoming more prevalent in occupiers minds and significant fines are now being threatened to landlords quoting in US dollars.

We should also see more opportunities for occupiers interested in purchasing ‘strata titles’ or long term leases within office buildings. Watch this space for a forthcoming event for potential purchasers.

But let’s focus and limber up to be part of the competition next year. The torch is lit, let the games commence.