EXECUTIVE SUMMARY
The office rental business from 2024 to 2026 is expected to improve in line with the recovery of the Thai economy, led by the service sector, resulting in increased demand for office space. In particular, the Green Office segment is becoming increasingly important, as it attracts large corporations and international companies seeking to enhance their business image in line with the ESG (Environmental, Social, and Governance) trend. However, the adoption of hybrid workplace policies by many organizations, along with the growing popularity of co-working spaces, has become a factor that reduces the demand for traditional office rentals to some extent. At the same time, at least 0.8 million sq.m. of new office space is expected to come to market, and this will put downward pressure on the occupancy rate. The outlook for rents will also be mixed. In the CBD area, newly completed office spaces will likely see stable or slightly increasing rents due to high demand from businesses. However, rents will decline in other areas, especially for older buildings.
Challenges that operators will have to face include: (i) stiffening competition to attract tenants, a result of supply growth that has outpaced the increase in demand; (ii) costs for developing green office space that will be some 15-20% higher than for developing standard office units; and (iii) the need for owners of older properties to raise their competitiveness, entailing paying for renovations and the installation of more up-to-date technologies.
Krungsri Research view
Krungsri Research sees the outlook for rental office space from 2024 to 2026, categorized by area as follows:
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Developers of rented office space in prime areas1/: Income will likely trend upwards, especially for the well-designed, modern, fully fitted-out, and professionally managed new Grade A and Grade A+ buildings that are most in demand. Competition in this segment is driven by high capital costs and a lack of land for development, and these create barriers to entry from new players to the market. As a result, the market is dominated by large incumbents who draw advantages from their financial position and their having access to land with high potential. However, the slow recovery in demand may cause the occupancy rate to decline slightly, while rental rates may not increase significantly, but will remain higher than in other areas.
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Developers outside the CBD and in the wider BMR region: Income will remain flat or contract slightly for developers of older office buildings or Grade-B office buildings. Properties in these areas suffer because land suitable for new projects is attractively priced and easy to find and develop, attracting a steady supply of new players to the market and adding to the competition. In addition, most renters of these units are SMEs that are in a more exposed financial position, and so recovery will generally be slower in this segment, and it will remain difficult to raise rents.
Overview
Over the past 5 years (2019-2023), more than 75% of rental office space in Thailand is in the Bangkok Metropolitan Region (BMR), as reflected in the nationwide office building construction permits (Figure 1). In Bangkok, office properties have tended to be clustered in the central business district (CBD), where office developments are located alongside flagship shopping complexes and high-end hotels and residential units. The CBD encompasses the central districts of Silom, Sathorn, Ploenchit, Wireless Road, Asoke, and the top end of Sukhumvit (up to Soi 24) (Box 1). This area is well served by communication links, including the BTS, MRT and expressways that link it to outer areas of Bangkok. However, success comes at a price and further development in the CBD is limited by a shortage of suitable land and the high prices asked for what remains. This tightening of supply has then encouraged developers to move further afield and thanks to the development of new transportation systems (including a significant extension to the Bangkok metro), most new office developments are now found further out from the CBD in areas such as Ratchadaphisek, Phahonyothin, Vibhavadi Rangsit, Chaengwattana, and Bangna (Figure 2).
Developing office rental space in the CBD is capital-intensive and because of this, the market is dominated by large developers with the requisite financial strength. The 2013 Bangkok city planning regulations (the ‘Bangkok Comprehensive Plan’) specify that office buildings may only be constructed in designated areas such as commercial zones (red zones), which are characterized by high density in economic activities. Additionally, with limited vacant land (office developments are typically either high-rise2/ or large buildings3/ and so typically need an area of at least 10,000 sq.m.), developers often reconfigure existing sites or demolishing old buildings to construct new ones on the same site. At present, new office developments undertaken in the CBD are thus generally of Grade A+ quality, which as the name implies, exceeds the requirements to meet Grade A standards (Box 2). Outside the CBD, developments are more typically undertaken by mid- to large-size developers, and these will focus on different types of projects. This will include both large-scale undertakings and smaller units that developers use partly for their own activities and partly to rent out to other businesses.
The management of office buildings in the BMR can be split into two types.
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Single ownership: This accounts for 80% of total office building supply. These are typically high-rise buildings that are owned by a single business, and which are managed by the building owner or by a specialist management company contracted in for the purpose. Most of these buildings will be rented out.
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Multiple ownership: This accounts for 20% of total office building supply. These operate more like condominium buildings, with units within the development sold separately. Within a single building there will therefore be a number of different owners, and these will have access to shared areas, forming a committee to jointly manage the property.
Renters of office space include both Thai and international companies in areas covering technology, e-commerce, co-working spaces, finance, and services generally. The industry benefits from the fact that the Thai economy is dominated by SMEs, and because these have limited finances, they typically rent their offices. Over the past 2-3 years, many new office developments have been completed in the CBD, including especially a number of large mixed-use projects, and so supply has grown rapidly while demand has struggled under the impacts of Covid-19 and the transition to hybrid workplaces. Given this, as of the second quarter of 2024, the occupancy rate in the CBD stood at just 66.3%, significantly lower than the Asia-Pacific average of 84.2% (Figure 5).
Formats at office rentals could offer space to rent out either by the entire floor, which would thus typically be occupied by a single company that would likely benefit from more favorable terms, or in smaller units, with a number of different companies therefore sharing space on the same floor. In either case, the landlord will be responsible for ensuring that the tenants are fully supplied with utilities and amenities, such as electricity, air conditioning, lifts, and car parking facilities.
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Lease agreement: This covers two classes of costs, ground rent (approximately 40% of the total) and service fees (the remaining 60%). The rental contract will be based on a fee for ground rent, set at a fixed price and quoted per square meter per month, while the contract for services will include all the non-rental fees, which will be payable at a variable rate according to usage (e.g., for electricity, air-conditioning, telephony charges, parking fees, management services and so on).
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Lease terms: Most leases run for 3 years. This benefits both landlords, since it assures them of continued revenue streams, and tenants, because moving to new premises incurs renovation, alteration and decoration costs. On the other hand, when lease terms are longer than 3 years, these need to be registered at the land office and in this case, a registration fee and stamp duty (of 1.1% of the total rental value) must be paid, which tends to make long-term lease agreements somewhat unpopular.
The market for office rentals is highly competitive and landlords are under significant pressure to adapt to changing circumstances. Thus, lease agreements are evolving and becoming more flexible and more favorable towards renters. For example, minimum rental periods have tended to shorten (to monthly leases, or to less than 3 years for longer lets), and the conditions set for rents, lease extensions and other parts of contracts have likewise become more adaptable. Landlords are also tending to modernize their properties and to upgrade their use of technology to manage buildings and safety processes. Grade A and A+ office buildings in convenient locations along mass transit lines, fully modernized, well managed, and meet all safety standards are thus in strong demand.
Following the pandemic and the widespread impacts of this on working life, business decisions over where to site operations have undergone a major shift. Thus, a survey of modern work trends undertaken by Epson Singapore found that instituting hybrid workplaces4/, that is, mixing on- and off-site working (in the latter case working at home, or in co-working spaces or cafés) has become much more widespread across Asia and that companies adopting these practices often view it as a type of staff benefit. Moreover, as hybrid workplaces become more common and a more normal part of modern lifestyles, the reduced demands placed on office space at any one moment and the gradual phasing out of the traditional assigning of a cubicle or desk to each member of staff will mean that renters will need to reevaluate their requirements. In particular, space that is more adaptable to changing needs and that is able to support a wider range of uses will tend to be more in demand.
Situation
As the Covid-19 pandemic began to abate in the second half of 2022, the government relaxed public health controls and with the country fully reopening and economic activity rebounding, the office rentals industry began to pick up steam again. This change in the outlook was reflected in the return of the Business Sentiment Index to its 2019 pre-Covid level (Figure 6), and so with worries over infection receding, many companies asked staff to return to on-site working. The market therefore strengthened through 2023, helped further by recovery in the tourism sector and adjacent parts of the economy. A return to the office coincided with an increase in market leasing activity from the end of 2022/early 2023. As supply increased, particularly of Grade A+ and Grade A quality buildings, most with green certification, MNC’s in particular, took the opportunity to relocate to these newer buildings (Figure 7).
Nevertheless, recovery in the Thai economy remained patchy through the year and this and the growing adoption of hybrid and more flexible working patterns dragged on demand for office space, which then grew at a lower rate than it had done prior to the outbreak of Covid-19. Alongside this, a significant quantity of new supply came to market (from projects including One City Centre, Park Silom, The Unicorn, Siam Patumwan House, and Pier 111), while some office space that had been closed for renovations also became available again (e.g., Empire Tower, Sathorn Square, and True Tower 2). Growth in supply thus raced ahead of demand, adding to downward pressure on the occupancy rate. The summary of the market situation for office rentals in 2023 is given below.
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Having been in decline since 2021, the net take-up rate5/ returned to growth of 214.5%, or by 28,339 sq.m. (Figure 7). A growing number of renters moved to more desirable Grade A or A+ buildings, with properties that had achieved green or environmental certification particularly sought after. These renters typically came from older, lower-quality offices, and so owners of the latter have tended to improve their competitiveness and to attempt to attract new/maintain existing tenants by renovating these, by being more flexible over rents, or by more carefully adapting these office spaces to their occupants’ needs. Overall, total occupied office space rose 0.2% YoY to 7.9 million sq.m. in the period (Figure 8), with renters in the consumer goods, co-working space and online marketing companies, looking in particular for properties in CBD or peri-CBD locations that offered good transport connections. The market was also buoyed by rents that remained reasonable.
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The supply of new office space contracted -12.1% YoY to 278,142 sq.m., most of which was in the CBD (e.g., Park Silom, The Unicorn, HQ Tower (Plan B), P23, Pier 111, Siam Patumwan House, Quant Sukhumvit 25, PUNN, and JLK Tower). Total supply thus rose by 9.5 million sq.m.6/ (Figure 8), split 20% Grade A and 80% Grade B (Figure 9).
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With growth in supply outpacing that of demand, which has only strengthened slowly, the occupancy rate has worsened steadily from its pre-pandemic level of over 90.0% (Figure 10), and in the year, the average occupancy rate slipped to a decade low of 83.3%, split 86.2% for Grade B offices and just 72.0% for Grade A offices. The increased supply creates a “tenants’ market” with favourable rental rates and terms offered by landlords looking to secure tenants. Rents started to fall in all grades and submarkets in 2023 except for Grade A+ quality space. Existing Grade A buildings, particularly older buildings in the CBD suffered most with rising vacancy rates, as these MNC’s relocated to newer buildings. Grade B occupancy rates have suffered less to date as companies in these buildings have been less willing to adopt hybrid working and would have to pay substantially higher rents if they moved to better buildings.
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Average rents for Grade A and Grade B offices fell to 7-year lows, declining by 0.4% YoY and 4.6% YoY, respectively. With supply significantly exceeding demand, many operators had little choice but to cut the costs borne by renters (e.g., by offering rent reductions or holidays for a certain period of time, or extending contracts without increasing rents) if they wished to attract new tenants or to keep existing renters in place. This was particularly noticeable for Grade B office space in non-CBD locations since this is typically occupied by businesses that are more exposed to economic uncertainty and that are thus most at risk of cancelling leases, reducing their total office size, or moving to cheaper premises. However, comparing average Bangkok rents to those elsewhere in the region, such as Hong Kong, Singapore, and Ho Chi Minh City shows that space overseas is typically 1.5-3.5-times more expensive, and this no doubt partly explains why international companies are keen to set up regional offices in Thailand (Figure 11).
Outlook
Through the first half of 2024, the market for office rentals in the BMR continued to come under pressure from excess supply, with 224,086 sq.m. of new space coming to market (up 66.3% YoY). This included over 90,000 sq.m. of space in each of the Tower 3 and Tower 4 sections of the One Bangkok development, as well as the Supali Icon Sathorn and Ratchayothin Hills projects. Total supply therefore expanded 3.7% YoY to 9.7 million sq.m., while demand edged up just 0.2% YoY to a total of 7.9 million sq.m. Demand within the CBD was hurt by the loss of 40,000 sq.m. of Grade B rentals as large tenants moved into their own properties, as well as by the shift in demand by some companies moving from Grade A to newer, better quality Grade A+ offices (e.g., One City Centre, Park Silom, and Tower 3 and Tower 4 at One Bangkok). The strength of supply growth then depressed the occupancy rate to fall to 81.5%. Through the remainder of the year, new supply will continue to come to market, partly due to the late completion of projects scheduled to be finished during the pandemic. Meanwhile, demand will build gradually. Moving to larger premises will help Thai companies build their corporate image and attract talents, while overseas players moving production facilities to Thailand (e.g., Electric vehicles) will naturally need office space too. For the year, the supply of rented office space is therefore forecast to rise by almost 500,000 sq.m, or by 61.8% YoY7/, against a rise in demand of just 1.0% YoY, or by 80,000 sq.m. This sharp discrepancy between the two sides of the market will then result in a fall in the average occupancy rate to 80.1% as well as a drop in rents, particularly for Grade A offices.
In 2025-2026, the office rental business is expected to improve in line with the recovery of the Thai economy, which is projected to grow around 3-4%. However, a greater number of companies, especially in the service sector, are transitioning to the use of hybrid workplaces. For these businesses, employee attendance on-site will increasingly be limited to occasions when they need to meet or work with their colleagues (e.g., for brainstorming sessions, team-building exercises, and other work-related group activities), while other companies will increase their use of co-working spaces. These factors will weigh on the overall growth in demand. In addition, the Green Office segment is becoming increasingly important as it attracts large corporations and international companies seeking to enhance their business image in line with the ESG (Environmental, Social, and Governance) trend, especially for buildings that have obtained a globally recognized certification, such as the LEED (Leadership in Energy and Environmental Design), WELL Building, or EDGE (Excellence in Design for Greater Efficiencies) standards that demonstrate the standards for environmental stewardship, energy efficiency, and sustainable design. The surging importance of this segment is reflected in data from Jones Lang LaSalle (JLL) Thailand that shows that as of 2024, some 3.4 million sq.m. of office space in the BMR met environmental standards, a doubling from the 2019 pre-Covid level of 1.7 million sq.m. The outlook for the industry is described below.
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Demand for office space is expected to grow by 1.0-2.0% annually over 2024-2026, down slightly from the 2.5% averaging over 2015-2019. Growth will be driven by gradual economic expansion that will then encourage companies to take on more staff, though this will be most noticeable for providers of co-working spaces and players in the consumer goods industries and across the service sector. Demand will also come from overseas companies (around 60% of tenants at present)8/, which will be in the market for modern, high-quality Grade A and Grade A+ space in the CBD. Renters will also consider moving to better-equipped premises (e.g., in terms of air conditioning systems, lifts, and proximity to metro stations). Particularly, Green Offices that have been built to or accredited with green standards (e.g., for energy efficiency, environmental standards, hygiene, or digital infrastructure) will be in demand, as renting these will help corporations reach their environmental targets more rapidly. Buildings that promote ‘well-being’ through the provision of green spaces or staff gyms will also be important. A survey by JLL found that 96% of office space users in Thailand aim to make their products and services 100% environmentally friendly by 2030, compared to just 17% in 2024. ESG considerations are now the top priority in office leasing decisions.
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Following the flood of space that came to market in 2023 and 2024, the supply of new office buildings should slow to growth of 1.5-2.0% per year over 2025 and 2026 (Figure 12). Approximately 80% of office space completed and opened in 2025 and 2026 will be located in Grade A and A+ buildings that meet green building standards (JLL estimates that the annual costs associated with green buildings are around 6% lower than for non-green alternatives, thanks to their lower energy consumption and reduced waste generation.) These offices will be situated in large mixed-use projects, such as One Bangkok, APAC Tower, Cloud 11, and Central Park Offices. This large expansion in the supply of high-quality office space will spur a significant rise in competition within the market, adding pressure on operators of older buildings (over 60% of the supply is of buildings over 20 years old, source: JLL). These will therefore need to be modernized and renovated to maintain their competitiveness and add value to their offerings. Meanwhile, the increasing imbalance between supply and demand growth will shift negotiating power to tenants, and these should thus be better placed to extract more favorable terms from their landlords.
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The overall occupancy rate will trend towards a historic low of 80% (Figure 13) as new supply continues to come to market (some 15 major projects are due to be developed in the period). Meanwhile, growth in hybrid working is eating into demand and adding to the glut of empty properties. Nevertheless, some segments will benefit from tenants in older buildings (those over 25 years old) moving to newly or recently constructed spaces (i.e., within the last five years) (source: JLL). This will force owners of older buildings to deploy more aggressive pricing strategies and to hold rents flat or even to cut these, especially when leases are due to be renewed. Landlords who are unable or unwilling to adapt to these changing market conditions will find it increasingly difficult to keep tenants in place and to maintain current occupancy rates.
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Rental rates for office space in the CBD will tend to remain flat or to edge up slightly. These properties are generally of higher quality and are more sought after than those located elsewhere, especially newly built Grade A and Grade A+ buildings that are modern, well-designed, and meet international standards. Prospective tenants are thus generally prepared to pay higher rents for new, high-quality, and fully-provisioned office space, allowing building owners to set higher rental rates. However, rental rates for Grade A offices may remain stable or decrease slightly due to the significant influx of new supply, which intensifies competition (with around 52% of the office space expected to be completed between 2024 and 2026 being Grade A and A+). Rental rates for non-CBD offices will come under greater pressure and are expected to decrease, as some tenants tend to move to the CBD for more convenient locations or better-quality buildings, even if the rental rates are similar to older Grade A offices in the CBD. However, older buildings with high occupancy rates that are well-maintained or renovated can somewhat alleviate rental pressure.
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Near-term challenges facing the industry will include: (i) planned investment in new office buildings that is expected to grow 1.4-fold over 2024-2026 relative to the previous 3 years against only weak expansion in demand, which will add to competitive pressures and reduce the space within which landlords can raise rents; (ii) rising demand for certified buildings (such as green building standards) from renters and especially international operations that need to meet their sustainability targets, though developing these typically raises costs by 15-20%; and (iii) the growing demand at home and abroad for access to more flexible office space, which will again add to the costs faced by developers and landlords.
Although landlords will have to adapt to changing work habits and patterns of demand, the office rentals industry will likely remain attractive in Thailand relative to other ASEAN countries thanks to: (i) Thailand’s location in the geographical center of Southeast Asia and its solid trade and investment links to neighboring countries; (ii) low rents relative to those in other major cities in peer nations (e.g., Singapore and Ho Chi Minh City); and (iii) the positive impacts on the industry of government incentives, for example the tax incentives available to companies setting up in the country as international business centers (IBCs)9/. As a result, despite the challenges presented by the headwinds described above, the market for office rentals will continue to grow through the coming period.
1/ Prime areas’ are those that developers view as having investment potential, having considered the accessibility of the site through communications and mass-transit networks, together with the infrastructure that is already in place. In Bangkok, prime areas include Silom, Sathorn, Wireless Road, Ratchadamri, and Ploenchit.
2/ High rise building’ means a building in which people may enter to reside or utilize, and which shall be at least twenty-three meters high.
3/ Large buildings’ means a building which has total floor area or area of any floor within the same building more than 2,000 square meters or a building which is 15.00 meters high or more and has an area in the same building more than 1,000 and not more than 2,000 square meters.
4/ Hybrid working refers to the practice of mixing traditional on-site or in-office working with remote off-site working.
5/ The net take-up rate refers to the increase or decrease in the total occupied space over the course of that year.
6/ CBRE Research adjusted its database in Q1 of 2023 to exclude home offices and buildings owned by government. This adjustment may result in discrepancies when comparing data with the same period of the previous year.
7/ Developments that are expected to be completed in 2024 include One Bangkok (towers 3, 4, and 5), Supalai Icon Sathorn, Ratchayothin Hills, KingBridge Tower, APAC Tower, and Summit Tower.
8/ Source: Jones Lang Laselle (Thailand) Ltd. (JLL)
9/ Revenue Department announced tax incentives for the establishment of International Business Center (IBC) in Thailand to replace tax measures for International Headquarters (IHQ), International Trading Centers (ITC), the Regional Operating Headquarters (ROH). IHQ, ITC, and ROH which are required to change to become IBC have been allowed since 25 December 2018.
10/ Co-working spaces are commercial areas available for use by people from any profession, who may rent space that is provided together with access to standard office infrastructure and equipment (e.g., desks, high-speed wi-fi internet access, meeting rooms, printers, etc.). Customers are able to choose rental arrangements to suit their needs, which may include using a private working area, discussing business in a small meeting room with a few others or using a more substantial conference room to meet larger groups of people. Likewise, rental arrangements may be made by the hour, the day or the month.
11/ LPN Wisdom and Solution Co., Ltd. (LWS)