Vacancy rates of Colombo’s office spaces increase

While nominal rental prices are held up, the vacancy rates of Colombo’s office space segment shot up in 3Q20, as small & medium-sized enterprises (SMEs) went into downsizing space to cut costs, and due to weak leasing demand following the lockdown period.

Jones Lang LaSalle (JLL) in its latest ‘Colombo Property Market Monitor’ revealed that overall vacancy rate in Colombo’s office spaces rose to 18.7 percent at the end of 3Q20 from 15 percent at the end of 2Q20.

“As the economy is gradually recovering from the adversities of the pandemic, the sentiment continues to remain cautiously optimistic. Decisions regarding fresh take up of spaces are getting prolonged. Companies are reassessing real estate portfolios in order to optimise both space and cost,” it said.

However, JLL expects a steady demand from the IT/ITeS, manufacturing and logistics companies for commercial real estate in Colombo.
In 3Q20, the rental growth in the segment recorded a marginal decline of 0.7 percent YoY to around Rs.324 per sqft per month as leasing demand remained muted with tenants taking a wait-and-watch approach.

Meanwhile, JLL highlighted that rents of prime grade A buildings have remained stable across the city. “Prime office buildings completed in 2019, continued to command rents at their fixed high price and has unchanged since,” it added.

However, JLL pointed out that most developers and landlords implemented short-term tenant retention strategies such as offering various incentives and benefits to overcome the short-term liquidity crisis.

It noted that Colombo’s office space is in “slowly declining’’ stage in rent cycle. 

 
Meanwhile, completions of office space buildings faced delays following elevated uncertainties in 1H20.

According to JLL, over 5 million sqft. of office space is expected in future supply with on-going projects, excluding Cinnamon Life office tower which is anticipated to be completed in 4Q20. The Central Bank data showed Colombo’s advertised commercial buildings sale price growth deaccelerating by over 5 percent in 3Q20 compared to the preceding quarter.

Moving forward, JLL expects the current economic recovery to drive demand and reduce the overall vacancy rates across 
the city.

“As a result, rents will neutralise in favour of both tenants and landlords. Nevertheless, the expected completions of Cinnamon Life, Ekroma and JFI in the short-term are likely to insert downward pressure on rents,” it elaborated.  (NF)