Rental gap between office, high-tech shrinks

Source : Business Times – 15 Dec 2009

This pares incentive to relocate, curbs flight from CBD Core

The rental gap between office and high-tech industrial space has narrowed over the past year due to a bigger correction in office rents than in high-tech rents.

This has reduced the need for companies to adopt the ‘decentralisation strategy’ which was popular in the 2006-2008 period when office rents were soaring.

Back then, occupiers that satisfied industrial usage guidelines decided to move out qualifying operations from office buildings in the CBD to business park/high-tech buildings in the suburbs to trim occupation costs.

For instance, financial institutions opted for high-tech space for their back-end data processing centres and data back-up and disaster recovery centres while continuing to maintain city offices for their frontline sales/marketing functions.

Jones Lang LaSalle figures show that the gap in monthly gross effective average rents between CBD Core office space and high-tech space is now at about $3.35 per square foot – compared with a $9.25 psf difference when the gap was at its widest in Q2 last year. In Q4 last year, the difference was $7.30 psf.

At its narrowest, in the third quarter of 2003, the gap was $1.80 psf.

‘We expect this gap to continue to compress in 2010 as the office market is likely to continue to experience larger correction than high-tech space,’ said Chris Archibold, Jones Lang LaSalle regional director and head of markets.

‘As the gap narrows, the incentive to relocate from office to high-tech industrial space diminishes. In fact, the recent outward flight from the CBD Core office market has ceased and this is likely to maintain in 2010.’

Mr Archibold reckons that a reversal of trend is plausible but not likely, given tenants’ concern that office rents could spike again in the future.

Angela Tan, DTZ South East Asian head of occupational and development markets, observes too that ‘the previous trend of companies decentralising or splitting back and front offices to reduce cost, has also slowed as the rental gap between city and suburban locations has narrowed’.

JLL’s CBD Core office basket covers Raffles Place, Shenton Way and Tanjong Pagar.

The average monthly rental value in this basket stood at $5.90 psf as at Q4 2009 based on preliminary estimates, a decline of 46.6 per cent from $11.05 psf in Q4 last year.

This decrease outpaced a 32 per cent drop in high-tech rentals over the same period, resulting in a narrowing of the rental gap between the two types of space.

The average monthly rental for high-tech space stood at $2.55 psf in Q4 2009, compared with $3.75 psf in Q4 last year.