APAC rental rates continue decreasing in Q4 2023

The Asia-Pacific office market will continue to favour tenants in 2024.

The latest Asia-Pacific Prime Office Rental Index from Knight Frank for the last quarter of 2023 revealed a 1.1% decline quarter-on-quarter, marking the sixth consecutive quarterly fall since the second quarter of 2022. 

The overall index dropped by 2.4% year-on-year, while the vacancy rate inched up by 0.5% from the previous quarter.

Tim Armstrong, Global Head of Occupier Strategy and Solutions at Knight Frank, sheds light on the factors driving sustained demand for prime assets in the region. "There is a flight to sustainability, better amenities, and flexibility," Armstrong explained. 

He said that companies are increasingly seeking buildings with greater sustainability accreditation to meet net-zero goals. Additionally, amenities supporting physical and mental well-being are in high demand, believed to help attract more people back into offices. 

“There's no doubt occupiers want more flexibility, more agility built into their portfolio, and either the landlords are offering greater flexibility or there is that component of flex office space that is allowing them to navigate uncertain waters at the moment,” he mentioned.

Despite the decline in rental rates, Armstrong noted an improvement in occupier sentiment, reaching its highest level since 2022. "Sentiment is improving but still fragile," he remarked. 

Factors like inflation, interest rate discussions, and labour market conditions are closely watched as they influence corporate real estate decisions.

Armstrong's outlook for the first half of 2024 remains cautiously optimistic, saying that sustainability will stay a top priority, and anticipated continued rebound in sentiment. 

He said that a notable shift is expected between A and B grade assets, with a pronounced flight to quality. Occupiers are likely to reduce their overall footprint while upgrading to better quality spaces.

Improvements in more affordable real estate markets such as Manila and India are also anticipated, while markets like Hong Kong and Singapore may face challenges. This shift could lead to increased offshoring in early 2024 as businesses manage costs.

“We  are seeing improvement in some of the cheaper real estate markets such as Manila. India is certainly on the rebound whilst at the same time, markets like Hong Kong and Singapore are probably struggling a little more so that offshoring some of the key functions could likely continue in the early part of 2024 as businesses manage their cost base,” he said.