Recalibration, not retreat: Decline in tech firms’ office uptake in Singapore explained

As Singapore’s tech sector adjusts office space as a cost-cutting measure, experts predict gradual rebound in demand.

Experts believe that the reduction in real estate demand by tech companies in Singapore is not a permanent shift, but rather a recalibration due to business cycles and the increase in remote work arrangements.

Latest data from Cushman & Wakefield showed that tech’s share of new leases in Singapore’s Central Business District (CBD) fell to about 20% in the first half of 2023, which is a sharp decline from the 46% in 2022.

Speaking to the Singapore Business Review, Wong Xian Yang, head of research for Singapore and Southeast Asia at Cushman & Wakefield, explained: “What we’re really seeing now is more of a recalibration of tech space take up due to business cycles rather than a permanent cut in real estate demand.”

He said the primary reason for the decrease in CBD new leases by tech firms is the pressing need to reduce costs amidst the current global economic slowdown.

“With higher interest rates, companies have become more cost-conscious, and reducing real estate space costs can be one avenue to cut costs,” said Wong, who also noted that companies may still be reevaluating their growth assumptions.

Prior to the pandemic, there was a surge in digital transformation, and companies were more bullish in their growth assumptions, resulting in increased adoption of office spaces.

Whilst the current economic realities have prompted tech companies to adjust their growth expectations, there is still more space being occupied than before the pandemic.

Another factor contributing to the reduction in office space demand is the increased adoption of remote and hybrid work models.

“The increased adoption of hybrid work has made it easier for companies to pare back the space they occupy,” Wong said. And this trend is not limited to the tech industry but applies to companies across various sectors.

Whilst tech leasing activity has slowed, the expert analyst said other industries continue to drive demand for office spaces in the CBD, like biotech, although at a slower pace.

At present, smaller tech companies, especially those in green tech, have also continued to expand and require office spaces.

Looking ahead, Wong said a return of demand for office space should be expected as technological advancements such as generative AI, 5G, and digital transformation continue to drive growth in the tech industry.

“Because Singapore is the gateway city for Southeast Asia… this will continue to spur company relocation to Singapore and [this] also bodes well for office demand,” he said, citing how many companies looking to expand in the Asia Pacific region are already headquartered in the city-state.

So, the prospects for near-future demand for office spaces is expected to rebound, but at a moderated pace.

Despite the challenges posed by the current economic climate and changing work patterns, Wong remains cautiously optimistic about the office segment’s future performance.

"Based on our latest data… vacancy rates have remained low at about 4.3% [as against] last quarter when it was 4.4%. So yes, it came down,” he said.

The statistics, though, should not undermine that “things are definitely of concern,” but Wong noted that “it hasn’t reached that level of crisis as yet.”

The Cushman & Wakefield analyst also said that whilst the return to pre-pandemic levels of office attendance is unlikely due to the growing preference for flexible work arrangements, the demand for sustainable and high-quality office spaces is expected to continue.

Citing Singapore’s tight supply situation supporting rental levels and keeping vacancy rates low, Wong said he anticipates a gradual recovery and continued investment in enhancing office spaces.

“Given that most gray buildings are Green Mark-certified, so they have sustainability credentials. This will drive demand for such assets given the increased focus on sustainability. This is expected to continue over the long term,” he concluded.