Saturday, 6 December 2008

Published December 5, 2008

Shadow office space grabs the spotlight

Companies trying to sub-let excess space as they streamline operations

By KALPANA RASHIWALA
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(SINGAPORE) As banks and other organisations look at scaling back their operations, some are trying to sub-let office space that they no longer need.

While subleasing has 'negative connotations in the short term, it's a good strategy in the medium to long term as it builds flexibility into office space management, allowing businesses to expand fast when the current slowdown turns around'.
- Jones Lang
LaSalle's regional director and head of markets Chris Archibold

Some 200,000 sq ft of such space may already be on the market, although part of it may be available only next year. The phenomenon - which some call shadow space - started to emerge in October, industry players say.

Knight Frank director of business space (office) Agnes Tay forecasts that about 400,000 to 500,000 sq ft of shadow office space may be introduced between Q4 2008 and end-2009, or an average of 80,000 sq ft to 100,000 sq ft per quarter.

However, another office leasing veteran said: 'It may be far easier to assess the situation in about half a year. By then, the right-sizing, job attrition and the office cycle would be far more advanced.'

Shadow space also emerged during the last office slump. According to CB Richard Ellis research reports, it amounted to more than one million sq ft as at the end of 2002.

Another consultant, Jones Lang LaSalle's regional director and head of markets Chris Archibold, says that while subleasing has 'negative connotations in the short term, it's a good strategy in the medium to long term, as it builds flexibility into office space management, allowing businesses to expand fast when the current slowdown turns around'.



'Given that Singapore is positioned as a regional hub, our view is that Singapore will be less impacted than other cities in Asia. However, we do expect to see some subleasing activity over the next few quarters, but it is impossible to pinpoint exactly how much space will be released,' he added.

HL Bank, Citibank and DBS are among the tenants known in the market to be looking to sublet excess space. Their ranks are expected to grow in the coming quarters as restructuring efforts at banks take effect.

Citibank is said to be considering subletting at least 60,000 sq ft of office space. More than half of this is understood to be at Tampines Plaza and the rest in the Central Business District, including Millenia and Centennial towers in the Marina area.

DBS is said to be looking for tenants for space occupied by its HR department at PWC Building and apparently has smaller pockets of space available at Equity Plaza, Raffles City, 6 Raffles Quay and Haw Par Centre.

The attraction to potential sub-tenants keen on taking over such shadow space is that they may be able to secure space at attractive rentals below current market rates from tenants who inked headleases with the building owners last year or earlier at rents below current values. The space may also come pre-fitted, saving the subtenant such costs.

Of course, the shadow space situation is not following any fixed template. HL Bank, for instance, is believed to be keen to sublet two floors at UIC Building at a discount. The bank is said to have inked its lease with the Shenton Way property's landlord, United Industrial Corporation (UIC), for about 20,000 sq ft earlier this year, when it had planned to move out of Tung Centre at Collyer Quay.

Industry watchers reckon HL Bank could be prepared to shave off around $2 psf in the monthly rentals of $8 psf and $10 psf it is paying UIC for its two floors.

Besides tenants wanting to sublet excess space, another reason shadow space emerges is when companies try to pre-terminate their leases with landlords, perhaps because they are shutting down or moving their operations to cheaper locations. Because such tenants are still liable to pay the agreed rental for the remaining duration of their leases, they sometimes try to sublet their space.

Property agents say subletting deals are best done with the knowledge and support of the building's owner. 'Sometimes the residual lease on the excess space a tenant is willing to sublet may be pretty short, say a year or even less; so the new tenant will want to negotiate a fresh follow-up lease with the landlord to dovetail with the expiry of the residual lease on the shadow space,' a property consultant said.

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