Nicholas Spiro

The View | Good pandemic for Asia’s offices is giving way to flight to quality

The advantages that carried Asia’s office market through the Covid-19 pandemic are weakening amid a supply boom and shifting priorities

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A woman rests on a bench near office buildings around the central business district in Beijing on July 15. The office market in China and elsewhere in Asia faces new challenges as occupier and investment demand focuses on premium buildings. Photo: AP

Nicholas Spiro

Published: 4:30pm, 22 Jul 2024Updated: 5:19pm, 22 Jul 2024

As early as January 2021, less than a year after the Covid-19 pandemic erupted, the average return-to-office rate – the office occupancy rate relative to pre-pandemic levels – in the Asia-Pacific already stood at 58 per cent. By November 2022, it had shot up to 80 per cent.

Fast forward to today and this is a level that is the envy of most office landlords in the United States. While some employers have taken a more aggressive approach to forcing staff back to the office, the shift to remote work in the US has become entrenched. According to Kastle, average occupancy rates among 10 leading US office markets have struggled to surpass 50 per cent since the end of 2022.

By contrast, with the exception of Australia, working from home was slow to take root because of cultural and economic factors. Yet even though the region’s offices were largely spared the severe disruption from the move to working from home, the sector faces acute cyclical and structural challenges.

In the investment market, Asian office valuations have not adjusted sufficiently despite the sharp rise in interest rates, making higher-yielding and more resilient segments of Asia’s commercial property market more appealing to investors. “There’s a stronger push to diversify [away from offices],” said Karen Wan, senior director of international capital coverage at JLL in Singapore.

However, it is in leasing markets where the challenges facing Asian offices are most acute. The fundamentals of the sector, while stronger than in the US and Europe, are under severe pressure. This is partly because of a supply boom. New completions accounting for 7 per cent of the total grade A office stock in the region are expected to be delivered this year alone, according to CBRE.

While leasing demand in India remains buoyant, underpinned by the country’s thriving offshoring and outsourcing industry, it is subdued elsewhere in Asia. Although Seoul and Singapore continue to benefit from tight supply, the overall supply-demand imbalance across the region has pushed up the average vacancy rate and exacerbated the decline in prime rents, which have fallen for two straight years.