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News Release

Bangkok

Dwindling Supply Gives Landlords The Upper Hand

The Bangkok office market is due to take off again, driving rents up  and availability down,but attractive terms can still be reached provided timing is right.


The current down cycle in the Bangkok office market continues to provide occupiers with the opportunity to realise significant savings. However, with continued demand and very limited new supply, the market is likely to soon move to the upturn stage of the rental cycle.
 
Tenants need to create leverage by timing their lease renewal strategies and carefully negotiating their review clauses to obtain maximum benefit.
 
OFFICE RENTS LIKELY TO RECOVER
According to a study by Jones Lang LaSalle,the Bangkok office market is bottoming out,with rents staying relatively stable in the second half of last year after having declined for five years following their most recent peak in 2006. The average rental cost for Grade A office space in central Bangkok is now 615 baht per square metre per month.
 
On the supply side, there are currently 1.35 million sq m of Grade A office space in central Bangkok. This includes additional space from two new buildings on which construction was completed last year  Sathorn Square and Park Ventures. Of the total stock,around 22% or just under 300,000 sq m,remain vacant. But since no new Grade A office development is scheduled for completion either this year or next and demand continues to expand, the remaining space is likely to be absorbed over the next couple of years.
 
While no new projects have been officially launched yet, with the exception of a few owner-occupied buildings, any new developments will take at least three years to complete. As a result, rents are likely to rise over the next five years.
 
LANDLORDS' LEVERAGE INCREASES
As the office market recovery takes hold,tenants will face increasingly tough conditions as negotiating leverage begins to swing back in favour of landlords.
 
Most landlords have already become less generous, offering fewer incentives to tenants.Rent-free periods are being shortened, and in some cases eliminated altogether. This is in contrast to 2008-2011, when rent-free periods of three months were commonly offered to new tenants.
 
As further evidence of the office market moving in favour of landlords, more are now unwilling to offer discounts on rents due to growing awareness of the lack of new supply over the next few years. Some of them have become more aggressive, and announced planned rent increases this year.
 
TENANTS MUST ACT QUICKLY
During the previous upwards cycle, Bangkok office rents rose for five years between 2001 and 2006 by an aggregate 76%. The upturn phase in the current cycle could be the same length, if not longer, based on limited future supply and the generally positive outlook of demand for Grade A space in central areas.
 
With rents forecasted to increase over the next five years, it is imperative that tenants act quickly. They should seek to renew leases or negotiate new ones as soon as possible and consider strategies to lock in rates during the upward cycle, paying special attention to lease clauses or rent protection caps upon renewal.
 
In a tightening market, tenants also have to consider other risk factors that may follow besides increasing rents. For example, with no Grade A space planned for completion in the next few years, tenants may later find it hard to expand in the existing building or find large space in a new location as desirable spots are likely to have higher occupancy levels.
 
TIMING IS EVERYTHING
Many organisations underestimate the time taken to negotiate a lease renewal or procure suitable new premises following a decision on their accommodation strategy.
With enough lead time and the appropriate strategy, it is possible to achieve competitive market lease renewals or acquisitions even in rising markets.
 
Planning the next move well ahead of the lease expiry also provides increased capacity for owners to plan their portfolios, manage their vacancies and release opportunities earlier to the market. This can lead to a winwin situation for both landlord and tenants during the negotiation process.
 
A SOUND STRATEGY IS A MUST
Occupiers will be able to achieve a more satisfactory outcome if they have several viable alternatives, which should be used to create leverage to negotiate terms.
An understanding of current and future market conditions is important in negotiating both the initial rental rate and rent review patterns.
 
In addition, the level of choice will be influenced by market factors, but buildingspecific factors and their impact on the relative negotiating strengths of tenants and building owners will be of equal and, in some cases,greater importance.
Prior to embarking on a strategy to renew or relocate, prospective tenants should take many factors into consideration. These include understanding leases, preparation of accommodation strategy, depreciation schedules, flexible fit-out, market knowledge,capital expenditure, critical equipment, landlord knowledge, corporate covenants and speed to market.
Lease negotiation tips
  • Start the negotiation process early: This is important because a landlord must believe that a tenant is actually out in the market looking for space.
  • Be well informed: Having accurate market information will strengthen a tenant's position in negotiations.
  • Create a competitive bid environment:Tenants can boost their bargaining power by letting the landlord know that there are other choices.