Pressure from oversupply on Vietnam’s office rental market

Large supply hits the market

Large supply in the context of rental demand slowing down significantly from the second half of 2023 due to economic decline is placing huge pressure on the operations of the office rental segment.

Consulting company Cushman & Wakefield predicts that the vacancy rate of office buildings for rent could reach over 20% during the period 2023 - 2026, due to the continuous increase in new supply.

The year 2024 will welcome a large number of new office supply, of which Hanoi is expected to welcome a total of about 80,700 square meters of office space and the total office supply in the capital will grow on average from 3.5%/year in the period 2023 - 2027.

This supply is mainly located in the districts surrounding the city center area. In addition, about 100,000 square meters of new Grade A office space is expected to come into operation in the period 2024–2027.

From now to 2026, the Hanoi market will record about 15 new projects, providing more than 389,770 square meters of office space. Grade A office space is expected to account for 86% of future supply.

Meanwhile, in Ho Chi Minh City, new Grade A supply is also expected to increase sharply in the city center in 2024–2025. The supply is mainly located in three projects, contributing a total of 118,700 square meters of high-end office space to the market.

Approximately 81,000 square meters of additional Grade A supply is also expected to be completed from non-CBD areas during the period 2024–2026.

With a sharp increase in new supply, many experts agree that the rental pressure on the market will be huge. In Hanoi, market demand was strong in the first half of 2023, but demand slowed in the second half of 2023 and is expected to remain low throughout 2024.

According to Ms. Ngoc, the vacancy rate is expected to be at 25–30% in 2023–2024 and then gradually decrease to about 20.5% in 2027.

Sharing the same opinion, Ms. Hoang Nguyet Minh, Senior Director, Commercial Leasing Department, Savills Hanoi also said that the number of large projects launched from now until 2026 may put pressure on rental prices, especially in Grade A projects. Grade A and B occupancy rates may decrease to 80% by 2026.

Competitive battle over quality

Economic instability has been affecting the office demand of businesses as tenants become more and more concerned about costs.

With abundant new supply, the market is expected to be favorable for tenants in the coming time with stable rents and a slight downward trend.

Besides, according to Ms. Ngoc, the competition for quality in the office market will increasingly heat up to attract tenants. For many recent new office development projects, the trend of landlords focusing on investing in sustainability and green elements in the building is becoming more apparent.​

According to Cushman & Wakefield, there are about 21 buildings certified with LEED/BCA Green Mark, which are the two leading construction quality standards recognized globally in HCM and Hanoi.

Along with that, most new projects in the Vietnamese market are pursuing or have achieved ESG certification. This means that hundreds of existing buildings will be under pressure to renovate to remain competitive in the market, especially if they want to attract tenants who are large multinational enterprises.

Ms. Trang Bui, General Director of Cushman & Wakefield Vietnam, added that global businesses are making Net Zero commitments, so real estate that integrates ESG factors will be an important point to help meet their goal.

Source: Cushman & Wakefield, theleader

Compiled by VBI