HCMC office vacancy to rise amid new supply: consultancy

Vietnam’s southern economic hub is expected to see an influx of new supply entering its office market in the second half, the real estate consultancy said Thursday in this study.

In Q2, Grade A office rentals in HCMC saw a quarterly and yearly increase of approximately 2% to $58.92 per square meter per month. The vacancy rate decreased to 4.2% from Q1's 4.9%, a small change before new supply starts to enter the market.

This slight rental increase largely reflected attempts by landlords to secure tenants into higher rental rates ahead of the arrival of new Grade A supply across the Ba Son bridge in Thu Thiem Area in Q3 and in the city’s central business district in Q4, said Leo Nguyen, Knight Frank Vietnam’s director of occupier strategy and solutions.

His firm predicted the city’s Grade A vacancy to settle around 4.4% for Q2, but the real ratio turned out to be 4.2%.

According to the consultancy, with the expected introduction of new Grade A supply in the second half, landlords will face significant challenges. Older Grade A and B buildings will experience a notable correction in rents.

“At the 75% occupancy mark, we anticipate rentals to drop by up to 20% against some buildings’ asking rents,” said Nguyen.

The company also predicts that Grade A rentals will decrease to $53 per square meter per month, $48.5, and $44.5 by the end of 2023, 2024, and 2025, respectively.

Correspondingly, vacancy rates are set to increase to 29%, 24%, and 32% for 2023, 2024, and 2025 - a significant shift in the office market.

The gathering storm clouds look darkest over Grade B offices, with this segment expected to be hit the hardest, as the market becomes increasingly tenant-favorable as the year progresses.

HCMC’s current performance for Grade B offices reports rentals at $34.10 per square meter per month, with a vacancy rate equal to 12.3% of that in Q1. Grade B rentals are projected by Cushman & Wakefield to decline to $28.5, $26.5, and $24.5 by the end of 2023, 2024, and 2025, respectively, accompanied by increasing vacancy rates of 14%, 17%, and 20%.

“We will see a rush to quality in the next two years,” Nguyen said.

“Older Grade B buildings in less-than-prime locations or with basic facilities and property management services will have no choice but to drastically improve their offerings, or reduce their rents, and both in many cases.”

Major transactions recorded this Q2 were dominated by the finance, banking, and insurance sectors (48%), followed by pharmaceuticals (19%) and technology (5%), although Knight Frank noted this activity was mainly renewals of leases by tenants staying in their existing buildings, and did not account for much additional lease space.

“Looking ahead, we anticipate new entrant tenants to emerge from sourcing and manufacturing companies driven by the ‘China plus one’ trend which will support net absorption,” he said.

“However, we are advising our existing tenant representation clients to consider holding onto their current leases for the next six months, if feasible, to leverage the upcoming surge in new supply and rental corrections across the market.”

Source: The Investor