Shadow Spaces Increase Office Oversupply, Puts Downward Pressure on Rents
October 13, 2020- The Covid-19 pandemic and the social restrictions and associated lockdowns have led some occupiers to sub-lease their real estate space, giving rise to so-called shadow space. This in turn will put greater downward pressure on rents, particularly in office markets which already have high levels of supply
According to the latest Knight Frank Asia Pacific Research, Supply and Shadows, excess supply in Jakarta, Manila, Shanghai, Beijing, and Bengaluru could pose a lasting challenge on vacancy levels in these cities, especially with 20 to 30% of their current stock due for completion by 2022.
The strategy of sub-leasing a portion of occupiers’ space is common in times of economic downturn, as it allows them to actively reduce their real estate costs without having to relocate or incur penalties for early lease termination. For companies, sub-leasing surplus office space can also help manage negative sentiment from key stakeholders.
“While shadow spaces add a layer of opacity to market dynamics, heavy supply pipelines remain the largest factor in predicting the region’s office market outlook. As greater supply enters the market in the coming year, sub-leasing space will serve to amplify existing vacancy rates in the market, dampening growth prospects for offices and adding more pressure on rents,” according to Knight Frank Asia-Pacific Managing Director Kevin Coppel.
With work patterns still evolving, businesses should plan for a bedding in period between establishing new working practices and defining the future of their office space, according to Head of Occupier Services and Commercial Agency Tim Armstrong. Sub-leasing also brings a layer of complexity compared to a standard lease agreement and can potentially diminish an occupier’s control over future negotiations, he said in the report.
