To let: 400,000 sq ft shadow office space

Source : Business Times – 11 Jun 2009

Financial institutions in search of tenants for space that they pre-committed to

CLOSE to 400,000 square feet of shadow office space is now available as financial institutions scramble to find replacement tenants for the space that they pre-committed to in the boom years.

A white paper on the subject by Colliers International says that the amount of shadow office space in Singapore rose by a steep 48 per cent over the last two months to hit 370,000 sq ft in May 2009 – up from 250,000 sq ft in March.

This is equivalent to 0.5 per cent of the islandwide office stock, or about the size of MAS Building at Shenton Way.

Likewise, Jones Lang LaSalle (JLL) estimates that some 400,000 sq ft of shadow office space is now available. The bulk of this came onstream from February to May this year, said JLL’s regional director and head of markets, Chris Archibold.

Shadow space is loosely defined as excess office space that companies have leased but are looking to sublet to a third party for reasons such as reduction in headcount.

Colliers’ white paper, which was released yesterday, identified the financial industry as the largest contributor of shadow space. It accounts for 46 per cent of all shadow space currently being marketed.

‘This is hardly surprising,’ said Colliers. After all, the financial services sector experienced explosive growth of 11.7 per cent in 2006 and 15.7 per cent in 2007. During this period, many financial institutions – including Citigroup, Credit Suisse, Deutsche Bank, Merrill Lynch, Prudential Assurance and UBS – embarked on aggressive expansion plans.

‘With the current economic downturn being fuelled by the collapse of the global financial markets, the reverse is now true,’ Colliers observed.

The white paper also gave a breakdown of where the available shadow space is located.

Of the 370,000 sq ft of shadow space available as at May 2009, some 42 per cent is located in the Raffles Place/New Downtown micro-market.

A further 24 per cent is located in the Marina/City Hall area, while the Shenton Way/Tanjong Pagar micro-market accounted for some 14 per cent.

Even more shadow space is likely to become available over the rest of the year and in 2010, analysts said.

Colliers projects that some 400,000 to 600,000 sq ft of additional shadow space could become available by 2010 from just financial institutions.

The problem will be worsened when construction of new major office buildings, in which financial companies have pre-committed to large amount of spaces, is expected to be completed.

‘This will add to the downward pressure on rents exerted by the potential supply of 9.6 million sq ft from Q1 2009 to Q4 2012, and could keep rents depressed for a prolonged period of time and delay market recovery until after 2010,’ said Colliers.

It projects that Grade A office rents will decline by up to 60 per cent in 2009 and 20 per cent in 2010.

JLL’s Mr Archibold, who similarly estimates that another 400,000 sq ft of shadow office space could be added up to 2010, also expects rents to take a hit from the increase in shadow space.

Colliers’ data shows that as at March 2009, grade A office rents in the Raffles Place area have plummeted by some 41 per cent since peaking in Q3 2008.

The intense race for tenants has even resulted in landlords offering incentives such as rent holidays in addition to closing rents that are sometimes 25-30 per cent below asking rents in order to retain or secure new tenants, the firm observed.