CBRE’s Moray Armstrong sees ‘a raft of opportunities’ post-Covid-19

By
/ EdgeProp Singapore
|
May 15, 2020 9:00 AM SGT
SINGAPORE (EDGEPROP) - Property agencies and consultancies, both big and small, have seen their transaction-related businesses adversely affected by Covid-19 and the two-month “circuit breaker” in Singapore, which has been extended to June 1. But the wider market corrections and economic recession stemming from the Covid-19 outbreak are of greater concern.
“This phase represents the most difficult and challenging times we are ever likely to have faced,” says Moray Armstrong, managing director of CBRE Singapore, in his email responses to EdgeProp Singapore. “My fear is that it will likely get worse before light re-emerges at the end of the tunnel.”
EDGEPROP SINGAPORE - Armstrong: I am a subscriber to a V-shaped market cycle and, as history will attest, Singapore tends to rebound far quicker and stronger than expected (Photo: The Edge Singapore)
CBRE's Armstrong: I am a subscriber to a V-shaped market cycle and, as history will attest, Singapore tends to rebound far quicker and stronger than expected (Photo: The Edge Singapore)
Having moved to Singapore in 1998, Armstrong rode out three economic crises: the Asian Financial Crisis of 1997/98; the bursting of the dotcom bubble in 2001, followed by SARS in 2003; and the Global Financial Crisis (GFC) in 2008.
ADVERTISEMENT
“Out of these awful times, as in other periods of adversity such as the GFC, SARS or even further back to the Asian Financial Crisis, a whole raft of opportunities will rapidly develop,” says the 32-year, crisis-hardened, real estate veteran. “I am a subscriber to a V-shaped market cycle and, as history will attest, Singapore tends to rebound far quicker and stronger than expected.”
Armstrong believes Singapore will be “the first port of call” for investors and multinational companies seeking safe havens and talent.
Appointed managing director of CBRE Singapore in February last year, Armstrong is responsible for the overall growth and strategic direction of the Singapore business. Prior to that, he was managing director of CBRE’s advisory and transactions business where he managed the largest team of transaction professionals in Singapore — across the office, retail and industrial business lines. He joined CBRE in 1992, when he was posted in Hong Kong before coming to Singapore.

Rethinking the role of office

A spin-off from the stay at home policies to contain the virus is the global adoption of telecommuting. With companies testing the balance between working from the office and other remote working locations, this has led to “a rethinking of the role the office plays in enabling work”, says Armstrong.
ADVERTISEMENT
EDGEPROP SINGAPORE - With companies testing the balance between working from the office and other remote working locations, this has led to “a rethinking of the role the office plays in enabling work (Photo: Albert Chua/EdgeProp Singapore)
With companies testing the balance between working from the office and other remote working locations, this has led to “a rethinking of the role the office plays in enabling work (Photo: Albert Chua/EdgeProp Singapore)
“The focus will be on setting up the right technology, culture, and expectations — to ensure employees can maintain productivity and engagement no matter where they are,” he continues. “We anticipate that when employees come into the office, it will be largely driven by their need to meet and connect with others.”
Organisations will continue the trend of looking to occupy less, yet higher-quality and better-equipped space, adds Armstrong. “The savings from the reduced footprint will be re-directed toward investments in technology and factors that enable occupant health,” he continues. “By providing employees with a portfolio of technology-enabled solutions and locations to work [from], our future workspaces will be more fluid than ever.”
There will be a bigger demand for buildings with sustainability and wellness features as companies strengthen their commitment to employee health and wellness. And this could potentially increase the development of more quality-certified buildings, he reckons.
ADVERTISEMENT

Two themes emerging, in opposing directions

EDGEPROP SINGAPORE -  Organisations will continue the trend of looking to occupy less, yet higher-quality and better-equipped space (Photo: Samuel Isaac Chua/EdgeProp Singapore)
Organisations will continue the trend of looking to occupy less, yet higher-quality and better-equipped space (Photo: Samuel Isaac Chua/EdgeProp Singapore)
Armstrong sees two themes emerging in the office market, but in opposing directions. “At one end, there is much discussion around greater acceptance and higher levels of remote working, which will clearly be dilutive to demand for conventional leased space,” he says. “At the opposing end, we expect to see more ‘de-densification’, ‘de-concentration’, business continuity planning and increased health safety and welfare requirements. In theory, this would suggest that occupiers may require additional office space.”
However, he does not expect net quantum demand for conventional office space to be impacted immediately.
As companies resume business and staff return to office over the coming quarters, they will be reviewing the “optimum balance” between conventional office leases, more flexible or co-working options and remote working, he says.
SINGAPORE EDGEPROP -  Demand for flexible and co-working space is likely to grow in the medium to long term, with occupiers using it as an alternative to expansion/contraction options, and a means for reducing capital or fit-out cost to cater to a more fluid workforce (Photo: Samuel Isaac Chua/EdgeProp Singapore)
Demand for flexible and co-working space is likely to grow in the medium to long term, with occupiers using it as an alternative to expansion/contraction options, and a means for reducing capital or fit-out cost to cater to a more fluid workforce (Photo: Samuel Isaac Chua/EdgeProp Singapore)
“Major landlords in Singapore are already seeing this shift and are catering to the need for agility by either their own flex offerings, or by partnering with or leasing to third-party operators,” adds Armstrong.
Turbulence in the co-working space is expected in the short term as operators find a balance between the right product mix, pricing and deal structures. However, demand for flexible and co-working space is likely to grow in the medium to long term, with occupiers using it as an alternative to expansion/contraction options, and a means for reducing capital or fit-out cost to cater to a more fluid workforce.
As at 1Q2020, the total office stock in Singapore amounts to 62 million sq ft. The agile space — co-working or serviced offices — occupies some 2.7 million sq ft, reflecting a modest 4.3% of total office stock, according to CBRE Research. Demand for agile space is expected to grow, with large occupiers expected to place between 5% and 15% of their footprint here — either via units provided by landlords or third-party operators. By 2030, CBRE expects at least three out of five buildings to have some sort of flexible office component.

Take-up in new builds to remain resilient

EDGEPROP SINGAPORE - CBRE’s forecast is that Grade-A (Core CBD) rents are likely to decline by 13% in 2020 to $10.05 psf per month (Photo: Samuel Isaac Chua/EdgeProp Singapore)
CBRE’s forecast is that Grade-A (Core CBD) rents are likely to decline by 13% in 2020 to $10.05 psf per month (Photo: Samuel Isaac Chua/EdgeProp Singapore)
About 1.17 million sq ft of new office space is expected to enter the market next year. Projects in the pipeline include CapitaSpring on Market Street, a joint development by CapitaLand Commercial Trust and Mitsubishi Estate Co; Rochester Commons, a business park and commercial project in Buona Vista by CapitaLand; Hub Synergy Point redevelopment on Anson Road by its owners; and the office component of Surbana Jurong Campus. With only two Grade-A office buildings in the pipeline for 2020/2021, Armstrong expects the take-up of quality new builds to “remain resilient”.
At 79 Robinson Road, pre-leasing activity has “progressed well”, he notes, with the building already 71% pre-committed. The only Grade-A building expected to be completed in 2021 is CapitaSpring. “With the current circuit breaker in Singapore, we expect that some developments will need to compress construction programmes to meet original completion dates,” reckons Armstrong.
EDGEPROP SINGAPORE - GRADE A OFFICE RENTAL
Source: CBRE Singapore Research
There have been no withdrawals of commitments in new buildings to date, he notes. Armstrong is of the opinion that “there is relatively low risk” of that happening. “The short-term environment is weak, but Singapore’s position as a major regional hub will be accentuated in the long term and we expect many MNCs will pivot towards Singapore as they re-evaluate strategies for Asia,” he argues.
CBRE’s forecast is that Grade-A (Core CBD) rents are likely to decline by 13% in 2020 to $10.05 psf per month. Depending on the duration of the Covid-19 outbreak, a potential rental recovery of 4.5% could be expected in 2021. “This is supported by a rebound in the economy and limited new supply,” reasons Armstrong. “Capital values are likely to be more resilient due to the limited stock of Grade-A offices and the dearth of transactions.”

Industrial rents — more suppressed

EDGEPROP SINGAPORE - Following the Covid-19 outbreak, supply chains have been disrupted, and sentiment in the manufacturing sector has declined sharply. In light of the weak business confidence, most of the leasing activity will be centred on renewals (Photo: Samuel Isaac Chua/EdgeProp Singapore)
Following the Covid-19 outbreak, supply chains have been disrupted, and sentiment in the manufacturing sector has declined sharply. In light of the weak business confidence, most of the leasing activity will be centred on renewals (Photo: Samuel Isaac Chua/EdgeProp Singapore)
Following the Covid-19 outbreak, supply chains have been disrupted, and sentiment in the manufacturing sector has declined sharply. In light of the weak business confidence, most of the leasing activity will be centred on renewals. “In the industrial market, there was an increasing number of occupier requests for more flexible rental negotiations,” explains Armstrong. “Some landlords have begun offering rental abatements, with the state taking the lead in offering a one-month rent waiver to all industrial tenants of government agencies.”
Armstrong sees the business park segment “better insulated against downturns” relative to the commercial office sector. “The prime business parks are operating off high occupancy levels with limited new speculative developments,” he says. “The sector looks resilient.”
EDGEPROP SINGAPORE - INDUSTRIAL RENTS
Source: CBRE Singapore Research
Amid market uncertainties due to the Covid-19 outbreak, overall industrial rents are likely to be suppressed further. “Factory rents could exhibit a steeper decline worsened by supply chain disruptions, whereas the fall in warehouse rents may be partially cushioned by a limited supply pipeline and short-term demand for storage space,” observes Armstrong.

Retail rents projected to fall 9% y-o-y

EDGEPROP SINGAPORE -  CBRE Research’s forecast is that rents are likely to see a 9.0% y-o-y drop for 2020 (Photo: Albert Chua/EdgeProp Singapore)
CBRE Research’s forecast is that rents are likely to see a 9.0% y-o-y drop for 2020 (Photo: Albert Chua/EdgeProp Singapore)
A steep fall in tourism arrivals and tourism receipts as a result of travel restrictions and border closings, has led to a slump in retail sales. As retail sales are highly correlated with prime retail rents, CBRE Research expects rental decline to accelerate from 2Q2020.
Landlords are expected to face increasing pressure to strike a balance between occupancy and rents.
“The cutback in retail supply for the next few years remains the saving grace for the retail sector,” notes Armstrong. “In addition, prime space remains very limited, and this will help to cushion some extent of rental and price declines.”
CBRE Research’s forecast is that rents are likely to see a 9.0% y-o-y drop for 2020. Assuming that there is some recovery by end-2020, rents are projected to improve by 1.3% y-o-y in 2021.
EDGEPROP SINGAPORE - RETAIL RENTS
Source: CBRE Singapore Research

Size matters

Listed on the New York Stock Exchange with a market capitalisation of US$13.68 billion ($19.35 billion), the Los Angeles-headquartered CBRE Group is considered the world’s biggest commercial real estate services and investment firm.
EDGEPROP SINGAPORE - CBRE has a very diverse and mature business in Singapore that spans beyond just transaction-based service lines (Photo: Albert Chua/EdgeProp Singapore)
CBRE has a very diverse and mature business in Singapore that spans beyond just transaction-based service lines (Photo: Albert Chua/EdgeProp Singapore)
Compared with the Global Financial Crisis, we have a stronger market position across business lines, a more diversified and contractual revenue base, a significantly stronger balance sheet with more than US$3 billion of liquidity and a leadership team that is far better equipped to manage our cost structure,” said CBRE Group president and CEO Bob Sulentic in a press statement on the firm’s 1Q2020 financial results on May 7.
CBRE has always been at the forefront of technology in the real estate space, says Armstrong. “We have also invested heavily in technology solutions and services that can help our clients manage functions and facilities through periods of disruption,” he adds. “Our digital and technology team, and workplace strategy team, are incredibly busy at present, extending support and advice to a multitude of customers to ensure these organisations remain as productive and connected as possible.”
In addition, CBRE has a very diverse and mature business in Singapore that spans beyond just transaction-based service lines. They include property management and facilities management, as well as valuation and occupier consulting services. “At times like this, it is important to be able to draw upon lines of business with more stable, ‘annuity-based’ revenue streams,” says Armstrong.
Read also: