Five reasons why Asia Pacific office market continues to strengthen despite economic uncertainties

The Asia-Pacific Prime Office Rental Index tracked by Knight Frank research strengthened in a second consecutive quarter.

It is up 0.8% quarter-on-quarter (QoQ), after rising by 0.3% in the preceding quarter, indicating that economic recovery is sustained from Q4 2021, despite a turbulent Q1 with accelerating inflation and the Russian invasion of Ukraine weighing down on market sentiment. The overall index is up 0.2% year-on-year.

1. More return-to-office have supported the underlying office demand

Just as the rest of the regions still struggles with shrinking demand, the leasing demand across Asia Pacific is fast stabilising in the post-pandemic world. Of the 23 cities tracked by the index, 21 cities recorded stable or increased rents this past quarter, as compared to 13 in the previous quarter.

More office workers are asked to be back in the physical office, thanks to more re-opening of the economy on the back of high vaccination rates. The mass adoption of remote working does not seem to be permanent in the Asia Pacific context, with many markets having experienced only temporary or no remote working. A large part of North Asia, such as Greater China, South Korea and Japan, has little or no intention of embracing hybrid working due to entrenched office-first work culture.

2. More occupiers are gravitating towards ESG compliant buildings

Large and mid-sized occupiers have highly prioritised economic, social and governance (ESG) compliance. Many young millennials not only work for a salary but also for a purpose in life, and ESG compliance could mean a make or break in the talent retention scene.

Many progressive organisations have also committed to a net-zero carbon emission target by 2030-2050 in a bid to show solidarity in combatting climate change, with the real estate aspect of the corporate business being at the forefront of the transformation. This has resulted in more attention being paid to the energy efficiency of the buildings, air-conditioning and ventilation, as well as the green credentials of the building options, resulting in an increased demand for prime office properties.

3. Newer, quality spaces have delivered solid rental performance

Against the backdrop of buoyant demand from the technology, finance and co-working/flex space sectors, many newer and quality spaces are highly sought after due to the continued expansion of these sectors.

Landlords of the latest buildings enjoy high pre-commitment rates and potentially higher rental premiums due to the high building specifications. As such, vacancy remains tight in this prime segment and should reduce further as more markets start to open their economies.

4. Asia-Pacific region relatively shielded from the macroeconomic uncertainties

Optimism at the start of the year was tempered by multiple resurgences of COVID-19, which resulted in Hong Kong and several tier-1 Chinese Mainland markets re-tightening movement restrictions.

The sustained economic recovery post-COVID-19 in the region is also challenged by the Russia-Ukraine war, which led to the surge in energy prices and inflationary pressure. As such, the growth forecasts for the region could be lower than what has been projected. Nevertheless, the Asia-Pacific market is not as directly impacted by the macroeconomic uncertainties as other regions.

The drop in prime office rents has been rather muted during this pandemic-induced recession. Asia Pacific region only experienced a 7% rental decline compared to a much more significant 31% drop during the Global Financial Crisis. Particularly in countries where there is sustained optimism over re-opening, corporates are choosing to take more decisive leasing decisions in view of the rising material costs and construction delays.

5. The market is coming off from a low base

Most of the markets in the region are on the mend as corporate downsizing has seen deceleration. There are also notable gains in employment across the region as businesses look beyond COVID-19 and resume more economic activities in anticipation of more relaxed social distancing regulations post-pandemic.

Given that the rental market just reached its trough in Q4 2021, the positive momentum will continue for at least a couple more quarters, as long as the world does not enter another recession. Hiring is still buoyant in many parts of the Asia Pacific region, likely supporting stable leasing demand in markets already out of the woods.

Read more of the key drivers and trends across key Asia-Pacific markets in Knight Frank’s latest Office Highlights Report.