Neither a local COVID-19 outbreak nor the global rise of remote work has significantly curbed demand for Grade A office space.
Over the past two years, a global work-from-home (WFH) trend has emerged that could reshape the relationship between workers and the office. But the WFH movement has not affected all countries equally. In Taiwan, remote work remains the exception rather than the rule.
This year’s COVID-19 outbreak in Taiwan, which lasted from roughly mid-May to August, marked the first time many organizations on the island experimented with remote work. The speed with which most companies brought workers back to the office once restrictions were lifted shows that the trend has failed to transform Taiwan’s strong office culture, except in the case of multinational organizations that follow a global policy. Those firms tend to implement a hybrid approach with perhaps three or four days a week in the office and one or two at home.
“Taiwanese companies think coming to the office is good for teamwork and creativity,” says Ping Lee, head of Taiwan research for property consultancy CBRE. “They don’t think employees’ productivity will be as good at home, where there is nobody to keep an eye on them.”
For office workers in the greater Taipei area, there are practical considerations too. “The typical home is not that large – it could get cramped with two people working at home,” notes Lee.
It is thus unsurprising that Taiwan’s office market, which was growing expeditiously pre-COVID-19, has largely shrugged off the pandemic’s effects. 2021 is shaping up to be a big year for the market: through September, the value of commercial property deals – including office and industrial – reached roughly NT$105 billion (US$3.8 billion), greater than the total for all of 2020, according to real estate services firm Cushman & Wakefield.
Major transactions thus far include China Life Insurance’s purchase of an office in Hsinchu for NT$2.3 billion, Mercuries Life Insurance’s acquisition of an office in Taipei’s Neihu District for NT$3.4 billion, and CTBC Asset Management’s successful NT$2.2 billion bid for an office building in Neihu.
While the COVID-19 outbreak slowed leasing in the second quarter, the market picked up quickly as case numbers fell, says CBRE’s Lee. “When it was not possible to do site inspections, some firms postponed leasing, but there were not a lot of cancellations,” illustrating the resilience of demand in Taipei’s office market, she says.
Taipei’s Grade A office vacancy rate in the third quarter was just 3.6%, among the lowest in the region. Singapore’s was 5.8%, Hong Kong’s and Tokyo’s were both around 7%, and Seoul’s was almost 12%.
The Taipei market might have experienced more rapid growth had it not been for the caution of international companies, who have shown less enthusiasm for large office expenditures compared to their local counterparts.
“The global COVID-19 situation continued to constrain business decision-making in the third quarter, with international companies remaining cautious with their office leasing strategies and maintaining continuity policies, such as work-from-home or split-site operations, to ensure an efficient response to any sudden new circumstances,” says Wendy Hsueh, Cushman & Wakefield Taiwan’s director of valuation and advisory services.
The coming supply crunch
In the short and medium term, the biggest challenge for Taiwan’s office market will be the limited supply of Grade A buildings in Taipei, analysts say. With an area of just 271.8 square kilometers, Taipei has limited space compared to other major business cities in the region, and the protected Yangmingshan National Park occupies over 40% of that area. In contrast, Seoul covers 605.2 sq. km., Singapore 728.6, Hong Kong 1,106, and Tokyo 2,194.
Additionally, commercial real estate does not lend itself to speculation in the same manner as the residential segment. “Developers often prefer to build residential buildings, as they see greater potential for the properties to appreciate,” says Tony Chao, managing director of commercial real estate services company JLL Taiwan.
The fact that Taipei is the preferred location for the headquarters of many companies, both international and local, further constrains supply. “There is plenty of space in Taichung and Kaohsiung, but the market demand isn’t there like in Taipei,” he says.
Post-pandemic, Chao sees the disparity between the Grade A and sub-Grade A office markets growing noticeably in Taipei. Given Taiwan’s intense heat and humidity, office buildings on the island tend to age rapidly without meticulous upkeep. Yet with some exceptions at the top end of the market, Taiwan does not tend to focus heavily on property management. Thus a building constructed just 20 years ago is considered “old” and generally undesirable, and as a result Taipei has no historical Grade A office buildings like New York’s Chrysler Building (completed in 1930) or 75 Rockefeller Plaza (built in 1947).
Older office buildings in Taipei tend to struggle to attract the right tenants because of the effect on companies’ ability to recruit talent. “The office is an important element of a company’s identity,” says Chao. “For big companies, there is a need for the office to be impressive in terms of both functionality and appearance.”
Compounding the challenge for Taipei is a slow-moving urban renewal process that prioritizes the rights of individual owners and tends to stall projects as owners hold out for better compensation. For that reason, it is much easier to build on an empty – or relatively empty – plot of land far from the city center than try to revamp space downtown.
That situation has prompted urban planners and real estate developers to look to the city’s eastern outskirts for expansion opportunities, with the erstwhile industrial area of Nangang emerging as a new business hub now that both Xinyi and Neihu have been thoroughly developed.
While some new Grade A offices are being built downtown, demand is likely to outstrip supply in the foreseeable future. The Hope Square project in Taipei’s Nanjing/Songjiang area was launched in the third quarter of this year, adding 4,600 ping (152,000 square meters) of new supply to the city’s Grade A office market. The new entrant “enjoyed very positive leasing take-up” and is now fully occupied, with Panasonic as the anchor tenant, notes Cushman & Wakefield’s Hsueh. For its part, CBRE expects tech firms will drive leasing demand in the coming months, with only some multinationals – those transitioning to a hybrid working model – likely to reduce space upon lease renewal. Given low vacancy, office rents can be expected to continue rising steadily, says Lee.