JLL Reports on Key CRE Trends for the Asia Region Preceding CoreNet Global's Singapore Summit

Edited: Jennifer Brenner
Source: Jones Lang LaSalle

More than 400 senior-level executives from the corporate and commercial real estate (CRE) industry around Asia will gather in Singapore on March 23 - 25, 2010 to examine various trends and contradictions that impacted the global economy in 2009.

One such paradox is the likelihood, that in 2010, lease pricing in commercial markets in Asia will rebound to the extent that it will no longer be a corporate tenants' market.

Real estate markets continue to change rapidly across the Asia region, according to Jeremy Sheldon, managing director of Jones Lang LaSalle's markets team in Asia Pacific. "In 2009, the global financial crisis put tenants at an advantage as no major city in Asia Pacific escaped its impact - the downward pressure on rents and hikes in vacancy - albeit to differing degrees. Now, as many countries move just as quickly from the downturn to a more balanced environment, some are already shifting back towards a more landlord favourable situation."

With such diversity of market cycles across the region, Mr Sheldon comments that CRE executives will play a key role in the way organizations transition back to business as usual or business growth, and whether they are able to emerge from the economic downturn with strength. "Cost saving will still be a clear objective - but the focus is shifting from short-term "survival", to building resilience for medium to long-term growth in this region - the growth engine for the future."

As confidence returns, Mr Sheldon notes that a number of important cultural and operational shifts in CRE procurement and utilization are also set to emerge with key trends likely to be as follows:

1. Upgrading but cutting into core space.
   The opportunities for tenants to upgrade their space and locations at zero or little cost are diminishing as rental rates bottom out in many markets in Asia. Financially strong corporations can use their leverage to enhance non- economic lease provisions, which will drive an improvement in leasing volumes in 2010. However, such activity will be tempered by a continuing sustained attack on occupiers' core space as better "line of sight" regarding real estate costs and ambitious saving targets are put in place.
   
   "We have witnessed this trend across different industry groups and geographies, with companies downsizing their core portfolio through space consolidation, subleasing, early terminations, and placing space into reserve," says Mr Sheldon. "We have also seen occupiers consolidating multiple brands and associated staff into single facilities not only to achieve headcount and cost reductions but also to facilitate a more collaborative working culture."
   
   
2. Alternative workplace strategies finally coming of age.
   Linked to space rationalization is the rekindling of interest in alternative workplace strategies (AWS). AWS has been part of the CRE vocabulary since the early 1990s but there is a sense from many markets that now is the time to activate these initiatives. "Major corporations operating in Asia are implementing workplace programmes designed to provide flexible work space and reduce both cost and space needs," expresses Mr Sheldon. "They are doing so in the context of strong portfolio planning that delivers some consistency and competitive real estate solutions that are attuned to the wider rhythm of the business and planning processes."
   
   
3. Reassessing 'own' versus 'lease' decisions.
   The direction of typical CRE tenure looks set to be challenged over the next decade. Corporate occupiers, whose balance sheets are in much better shape than some real estate investors, are increasingly exploring the possibility of using their lower-cost capital to drive down long-term occupancy costs by acquiring distressed facilities at deep discounts. Furthermore, proposed lease accounting changes will start to eliminate the traditional objections to ownership.
   
   
4. Sustaining cost avoidance will be key.
   Real estate costs are more transparent and better understood post downturn. Cost consciousness is likely to remain part of the corporate DNA even as growth returns. However, the focus is shifting from direct, short-term savings to some targeted investment aimed at longer-term cost avoidance. For example, in Asia Pacific a return to headcount growth has led to a renewed interest in the potential cost efficiencies of campus developments.
   
   According to Mr Sheldon, many global corporations activated a lean operating agenda through the difficulties of 2009 but kept issues of strategic importance in their longer-term thinking. Sustainability is one such important issue, not least because of the cost saving opportunities of implementing energy efficiency programmes, as is well documented in a recent CoreNet Global and Jones Lang LaSalle survey.
   
   "In an overall sense, 2010 will be known as much as 2009 as an important time for companies to improve their ability to be flexible," summarized CoreNet Global Director of Membership Richard Kadzis. "Flexibility in a number of contexts - financial, cost management, talent, sustainability, workplace practices and so much more - is in itself a major hedge against risk at a very uncertain time. After all, it's all about balancing contradictions in an uncertain world."