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HCMC’s sluggish office market prompts landlords to turn flexible over payments

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HCMC – The office market in HCMC continued to go through a stagnation period in terms of performance due to Covid-19, which strongly affected many enterprises, CBRE Vietnam said in its third quarter report.

The market witnessed a negative net absorption in the first nine months of 2020. Some 31% of major transactions collected and closed by CBRE were for contraction purposes, which is expected to continue becoming a trend until the end of this year.

There was no new supply in the HCMC office market in Q3 of 2020. The supply remained at roughly 1.37 million sq. meters.

In Q3 of 2020, Grade A vacancy was recorded at 11.5%, up 3.3 percentage points y-o-y and slightly down by 0.3 percentage points q-o-q. The contracted space of Grade A by the end of Q2 of 2020 was gradually absorbed in Q3 of 2020 by existing tenants at the given buildings through the expansion and renewal of contracts.

The Grade B vacancy remained unchanged compared to the last quarter but increased slightly by 1.3 percentage points compared to the same period last year.

In the reviewed quarter, Grade A rent stayed relatively the same q-o-q but decreased by 5% y-o-y.

Although remaining unchanged q-o-q, landlords were still very flexible in terms of payments and closing rents. Some landlords even offered a closing rent of US$3-4 psm pm, lower than the asking rent for new tenants.

Insurance, technology and retail/trade/e-commerce were the top three most active sectors in terms of office leasing despite the Covid-19 outbreak. These three industries accounted for 69% of the total transactions closed and collected by CBRE in Q3 of 2020.

The construction of new office buildings in HCMC was still moving forward and some 80,000 sqm is expected to be completed by the end of this year. Most of the new additions will concentrate in Binh Thanh and seven other districts.

The landlords of these upcoming buildings have proactively decreased their asking rents by US$1 to US$3 psm per month compared to Q4 of 2019 to attract tenants.

The office rental rate in HCMC is expected to drop by 8-10% y-o-y and the vacancy rate will increase by 7-9 percentage points y-o-y by the end of 2020 due to new supply and the negative impact of Covid-19.

If a vaccine for Covid-19 is successfully released by December 2020, the rental rate in 2021 is forecast to be relatively stable. However, if a vaccine is only released by June 2021, the rental rate will continue to shrink further by 5% compared to that of 2020.

Pham Ngoc Thien Thanh, associate director of CBRE Vietnam, said Covid-19 has reshaped the market dynamics, with the negotiation power shifting toward occupiers. The market will have more new projects coming online in decentralized areas with competitive rents.

“In response, landlords will be more flexible in terms of rental rates and leasing terms. To stay ahead of the competition, landlords should consider applying workplace strategy tools to evaluate the current strengths and deficiencies of their buildings, in order to come up with an optimal solution to increase the value of their assets,” Thanh said.

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