Scarcity of larger offices in Taipei impedes leasing activity

The limited office space availability allowed landlords to raise rents in 4Q20.

The lack of office space continued to constrain leasing activity in 4Q20, according to JLL. New leases were mainly made for small-to-medium units. With around 3,300 ping of office spaces surrendered in Xinyi, the total net absorption was recorded at -3,700 ping.

New leases were recorded at around 1,500 ping. Tenants were mainly from e-commerce and tech industries, which took up around 48% and 39%, respectively. Deals were mainly located in Dunhua North and Dunhua South submarkets. The market still could witness some MNC subsidiaries moving from Grade A spaces to co-working, in line with parent companies’ policies to decrease capex.

Withdrawn redevelopment building may hinder market momentum

The owner of Cathay Dunhua Building, located in the Dunhua South submarket, has indicated that the building is obsolete and it will be redeveloped into a brand new 28-storey building in 2026 with around 10,000 ping of office space. The owner withdrew the building, around 8,400 ping of office space, from the market, futher tightening availability of stock.

Due to the space surrendered in Xinyi, overall market vacancy slightly increased by 0.8% q-o-q, to 2.16%. However, the newly released unit is likely to be absorbed rapidly due to the rising office demand. On the other hand, China Life and KGI HQ, which were supposed to release their space in the quarter, have postponed their plans to 1Q21 as the building’s interior fit-out is not yet completed.

Growing office demand continues to push up office capital value

Limited office space availability allowed landlords to raise rents in 4Q20. The overall rent slightly grew, up by 0.6% q-o-q, reaching NTD 2,827 per ping per month. Xinyi, Dunhua South and Non-Core CBDs quarterly rental growth increased by 0.3%, 1.0% and 0.9% q-o-q, respectively, in 4Q20. Rent is forecast to surge up more rapidly with new building releases in the next year.

Capital values continue to soar driven by robust demand in 4Q20. Office demand has gradually diverted to Grade B space and industrial-office markets. For example, Huangshan Zhongshan, a Grade B office in the Non-Core district, has sold out its 10th and 11th floors for around NTD 11.5 million in the quarter, breaking Western Taipei’s historical record.

Outlook: Rents and capital values expected to accelerate rapidly

The growing trend of building redevelopment will drive more demand for office space. In addition, the growing pandemic-favoured industries, such as e-commerce, gaming and remote tech companies are expected to actively expand in 2021. Therefore, since the limited existing available stock is unable to thoroughly absorb the demand, it is likely we will see strong rental growth in next few years.

The abundance of dry powder in the investment market and the steady growth of business expansions and consolidations are expected to continue to push up office capital values in the following quarters. The saturated CBD market will divert demand to suburban areas of Taipei or industrial offices in other cities, especially for those tenants who are looking for large offices.

Note: Taipei Office refers to Taipei's overall Grade A office market.