With rentals dropping while vacancies and interest rates climb, profitability and cash flow are taking hard hits.

Guided by the previous master plans

The recent revisions of our national master plans intended for the office segment to be decentralized from the Central Business District (CBD). These additional clusters of office locations are designed to bring “quality jobs near homes” while reliving the transport infrastructure from over-congestion.

Following the success of the Tampines Regional Commercial Centre, Master Plan 2008 (MP2008) included new regional commercial centres in Paya Lebar Central and Jurong Lake District. Master Plan 2014 (MP2014) further expanded the commercial centres to include a very large expanse of land called the North Coast Innovation corridor, comprising the Woodlands Regional Centre which will be developed on 1 million square meters of land and the Punggol Learning Corridor and Creative Cluster. Plans were also made to expand the Downtown Core, with the Bugis-Ophir-Rochor corridor east of Marina Centre and The Great Southern Waterfront west of Tanjong Pagar.

What has transpired since?

Property investors big and small bet on any news that is remotely positive. Many have invested in the North Coast Innovation Corridor story by buying into properties in Woodlands, Yishun, Sembawang and Punggol. Adding fuel to the frenzy was the announcement that the future rail link to Johor will be connected to the Woodlands North station. Initially announced in year 2010 to be completed by 2018, the Johor Bahru–Singapore Rapid Transit System (RTS Link) has been delayed several times over. As at the time of writing this article, the decision for the construction has not been signed off. I am of the opinion that the RTS Link may complete years after year 2022.

Similar stories were told about the potentially bright future of Jurong Lake District and Paya Lebar Central. Investors also piled on their bets there, investing in the surrounding residential, retail and industrial segments.

The fact is, since MP2008 and MP2014 were announced, we have seen less than 10 office development projects in the regional commercial centres. The Woodlands Regional Centre had one commercial site tendered out for office development in early 2014 and nothing else.

With so much commercial land to develop in so many locations, including sites in the fringe of Downtown Core, how are the planners to prioritize office space development in each of the regional commercial centres, or the downtown core, over another. Large corporate office users, developers and investors are similarly confused about the pace of development in each location. It is not surprising that we have seen the reversal of decisions by several major government organizations and large listed companies in their intended shift to Jurong Lake District and the One North precinct.

Our discussions have not even included the commercial centres in Changi Business Park, Alexandra Tech Park and the Bouna-Vista-One-North-Science-Park precinct, where significant office and business park supplies are being added. Neither have we discussed the potential competition from Industrial B1 space designated for developers of FinTech and software applications. And what about the most recent addition to the office development foray: Jurong Innovation District?

Table 1: Vacancy and supply of space in the Office, Business Park and Industrial (Multiple User Factory) segments as of 4Q15.

Office Segment                                            4Q15

Islandwide vacancy rate                             9.5%

Islandwide vacancy                                     7.7 million sqft

Upcoming supply                                        11.3 million sqft

-of which 2016                                              5.0 million sqft

-of which 2017                                              1.7 million sqft

o-f which 2018                                              2.2 million sqft

Business Park                                              4Q15

Islandwide vacancy rate                             15.9%

Islandwide vacancy                                     3.3 million sqft

Upcoming supply                                        2.1 million sqft

Industrial – Multiple User Factory           4Q15

Islandwide vacancy rate                             12.8%

Islandwide vacancy                                     14.2 million sqft

Upcoming supply                                         11.3 million sqft

Source: URA, JTC, Century 21 (IPA)

Structural changes afoot

Industries which are shrinking recently, such as Oil & Gas, Offshore & Marine, commodities, logistics, shipping and manufacturing, as well as the investment banks and financiers serving them, are giving up office space.

Coupled with our weak economy and declining demand is the structural change in how office space is being used. Technological leaps such as FinTech, mobile apps and affordable robots are disrupting current industry practices and supply chains, impacting how businesses are run.

Forecasts by Barclays and CitiBank indicated that FinTech companies will reduce the number of bank employees by between 30 to 50 per cent within 10 years. Singapore’s financial services industry will not be spared. Bankers could be limited to senior relationship managers and back-end data center engineers, with the bulk of transaction processing and middle offices displaced by FinTech apps.

Technology startups prefer to interact closely with businesses in the same eco-system, and therefore the recent fashion in office configuration, “co-working space” is now in vogue. These companies share work spaces with other companies, drastically reducing the square footage of office space per headcount. Gone are the days when a manager works from a 100sqft room furnished with a 6-feet-wide desk and 2 chairs in front, or a director from a 150sqft room with an 8-feet-wide desk and a small discussion table on the side. Co-working spaces and mobile workers require about 50 sqft per employee, down from the traditional rule-of-thumb parameter of “80-100 sqft per staff”.

Where do we go from here?

Ironically, if the regional commercial centres succeed, they will compound the demise of the CBD that is at risk of being hollowed out by FinTech. Just as having malls in the suburbs reduces the reasons for suburban dwellers to visit Orchard Road, the future occupants of the CBD will be limited to the largest corporations.

But the fact remains that bringing jobs closer to homes is not as easy as building homes nearer to jobs. Corporations are not as flexible in their choices of location as individual workers and their families are. Therefore, it might take decades of economic growth before demand for the various regional commercial centres build up sufficiently.

Still, if the planners were faithful to the master plans’ designs for the regional commercial centres, even in a weak economic environment, sites for small sized office buildings of around 300,000 sqft Gross Floor Area should be launched for sale in Woodlands, Paya Lebar Central and Jurong East.

More urgently, in the face of structural changes in office usage, we should re-map the current patchwork of commercial centres, and ask how Singapore might boost business demand to fill the existing 11 million sqft of vacant office and business park space, as well as where we might find the users for the next 13 million sqft of office and business park space completing by 2018.

Ku Swee Yong is a licensed real estate agent and the CEO of Century 21 Singapore. His fourth book “Weathering a Property Downturn” is available in all good bookstores near you.