In a July 27 report, Morgan Stanley says office rentals across Asia declined 2–13% in 1H2020 owing to weaker demand due to negative GDP and higher unemployment but excluding the impact of working from home (WFH).
With WFH panning out relatively well across Asia, Morgan Stanley expects big tenants such as financial institutions and tech players with well-established infrastructure to return 10% of their existing office space to landlords over the next three years.
Most office leases are for 3–5 years so the impact of WFH is likely to be felt over time rather than this year or next. Companies may augment their smaller offices with flexible space provided by companies such as WeWork, the report suggests.
In Singapore, Morgan Stanley expects Grade A office spot rents to decline 15% in 2020–21, before rising 5% in 2022. “We think the net 10% decline in rent over three years will be underpinned by island-wide vacancies increasing from 10.5% to 12.5% through this period, as demand trails a below-trend net supply outlook,” Morgan Stanley says, adding that office occupiers may reduce their footprint by 10% over five years.
In the near term, occupiers may need 15–20% more space for safe distancing, according to Cushman and Wakefied, with around 6% more space needed by 2022, negating the impact of WFH.
Morgan Stanley says, “We think valuations of the three largest Singapore office REITs – CapitaLand Commercial Trust (CCT), Suntec REIT, and Keppel REIT — are pricing in a 10-20% drop in office rents. At these levels — particularly for our preferred office REIT, Keppel REIT — we think that market concerns over structural headwinds due to the WFH trend seem overdone.”
Morgan Stanley’s least preferred office REIT is Suntec REIT, and it is neutral on CCT.
