Hanoi Office Market – Look back a decade of development
Demand for offices for lease is forecasted to grow steadily.
- Van Nguyen
JLL (Jones Lang LaSalle) opened its first office in Hanoi in 2007 and it can be said that the growth of JLL in the local market is accompanied by the strong growth of the office for lease market in this city.
Over the past decade, the market has witnessed a strong increase in the supply of office for rent as well as diversified developments of the market over time.
Before 2010, the total supply of the market was only about 677,000 m2, by the fourth quarter of 2020, the total supply had increased by more than 3.2 times, reaching approximately 2.2 million m2 of office.
Not only the number of offices has been increased, but the quality of the rental areas has been also strongly improved. In the third quarter of 2020, the Capital Place building was completed after more than 2 years of construction and this is the first building in Hanoi granted a green building certificate - LEED Certificate, which is the most prestigious certificate to assess the Sustainability of a building. Capital Place has offered fastidious customers in the market one more choice to locate their headquarters in Hanoi. And it is also the beginning of a new era when green standards are one of the important criteria when choosing the location of offices of multinational corporations. Following the introduction of Capital Place, the market recorded a series of office for lease building projects announced with LEED certificates including: TechnoPark Tower (LEED Platinum), 6QT building (LEED Platinum), Lancaster Luminaire Building (LEED Silver); in which 6QT and Lancaster Luminaire are the two future supplies, expected to be completed in the second half of 2022.
Although Hanoi office market is still considered an undeveloped market, also known as an emerging market, leading to unclear standards on how to rank buildings, JLL realizes that the investors of Hanoi office building are increasingly concerned about the quality of the buildings and towards satisfying the requirements of tenants when developing their projects. For example, the number of office buildings equipped with raised floors has increased dramatically over the past decade or as a number of new buildings have air and water filtration systems installed aiming at creating a healthier workplace environment for users.
In terms of geographical location, the Hanoi office market has had a strong geographical expansion in the past 10 years and is continuing to develop into new areas in the coming time. Before 2010, the traditional office area of Hanoi was the area of Hoan Kiem district and was limited to the surrounding boundary. The period 2010 - 2013 witnessed an explosion of supply in the Cau Giay and Nam Tu Liem districts, which are called the Western area of Hanoi. There was a strong westward movement during this period. Customers leave the central area, where office rents are expensive, to the Western Hanoi area where the office rent is only a half or less than a half for a completely new office space.
The shift to the West has helped cooling down Hanoi office rents. If before 2010, the rent of Grade A office in Hanoi was 47 - 48 USD/m2/month, then at the peak period of moving out of the center, the rent for Grade A office was only 25 USD/m2/month (Quarter 1/2015).
The supply increased sharply, competitive pressure came from buildings in the Western area to increase the occupancy of buildings in this area, including Keangnam Landmark 72 Hanoi. This is the tallest building in Hanoi up to now which includes 72 storeys and provides nearly 100,000m2 of office space and was completed in October 2011.
The introduction of the Keangnam Landmark 72 Hanoi building has made the Hanoi office market change drastically. Office leasing investors have had to apply more flexible policies to attract tenants, for example: increasing the free rental period for setting-up, offering the period with free rent to lower the actual rent or free parking etc.
It can be said that the period from 2010 to 2015 is the sublimation period of the Hanoi office market and the period when tenants have many choices when considering office relocation and this is the market form called the Tenant's Market, which means that the lessee has a more favorable position in negotiations. Thanks to the decrease in rental prices, increased rental incentives and good economic development, the total absorption volume of the market in these 5 years has reached 771,000 m2, 4.3 times higher than the previous period.
After 2015, the Hanoi office market witnessed the times when the Hanoi office supply slowed down because investors were more cautious when investing and were concerned when office rents fell to the bottom. Some large buildings completed before 2015 have had a difficult time in increasing the occupancy. Typical example in this period is the Lotte Center Hanoi building which is the first commercial project invested by the Korean Lotte Group in Hanoi. Lotte Center Hanoi building with high-class finishing standards has created a shift from the Western Hanoi to the area of Ba Dinh, Dong Da, also known as the Mid-Town of Hanoi.
In fact, moving to the Western Area is the trend towards the goal of cost optimization. However, due to limited infrastructure, companies in the Western area must pay a huge and invisible cost called the cost of moving if they want to move to the central area. Thanks to its location in the middle of Hanoi, Lotte Center Hanoi building has attracted a large number of tenants and filled most of the leasable area up to 45,000m2 in only about 2 years since its completion. Following Lotte Center Hanoi, other office for rent projects in Ba Dinh and Dong Da districts also benefit from the desire to balance costs and travel time.
Thus, the period after 2015 is the period when the market occupancy has been more geographically balanced. The office market in Hanoi is divided evenly in three areas, including: Central area, Ba Dinh Dong Da district area and Western area.
The Hanoi office market has gradually transformed into a Landlord's Market after 2015. This transformation has happened so slowly that many people do not realize this trend until the occupancy rate of the Hanoi office market reached a record of 96.1 % for the Grade A segment (in Quarter 4/2018). Never before has tenants had so few choices in the market, nor have Landlords had so many benefits in choosing tenants or negotiating.
However, the Covid-19 pandemic taking place in 2020 has been restoring the order of the office market, not only in Hanoi but on a global scale. We are witnessing the historic birth of a new work trend. It is remote working on a wide scale with all industries. In the past only freelancers had the option to work outside of a permanent office, now nearly employees of all industries have the option to work remotely and work from home.
JLL's customers in the period from 2020 - 2022 have made a lot of changes in their office operations, such as dividing employees into different groups to work at office and allowing their employees to choose working at office or from home, reduce the rental area to optimize costs, move from a traditional office to a serviced office to cut down on office rental costs.
Although the Covid-19 pandemic has been well controlled in Vietnam, the serious impact of the pandemic on a global scale is expected to continue to affect companies' office usage habits.
In addition, from the perspective of the Lessor, continuing to invest in and improve the building's hygiene and safety is very important to ensure a safe working environment for the tenants. Buildings around the world are applying technology in management to reduce the risk of disease spread in buildings, such as "contactless control" technology. And several buildings in Hanoi are also researching to apply this technology in building access control, especially buildings in the research and development stage.
The development of the office market in the coming period is forecasted to focus on non-central areas because the land fund in the central areas is still very limited. Accordingly, the investors of new buildings will need to focus on improving the quality of the building, towards the user experience to increase competition and attract customers. The improvement of building quality following the green trend, namely the application of standards of international and Vietnamese green certificates such as LEED, WELL, EDGE, LOTUS, Greenmark has been helping developers to attract customers. Accordingly, the number of office building projects registering and pursuing green building certification is increasing. In the past few years, the number of green-certified office buildings has increased sharply, especially since 2017. Consequently, there are about 12 green-certified projects out of a total of more than 53 green buildings in the Northern Area.
Along with the trend of green building development from investors, the market also recorded a number of international office tenants who actively applied for green building certification for their own offices to improve quality workspace.
We believe that pursuing the trend of green building development will be the trend leading the market in the coming time, not only from the perspective of office building developers but also office tenants.
The development of satellite urban areas around Hanoi, which entails land fund for the development of commercial projects, including offices for rent, will also bring a new face to the Hanoi office market in the long run. According to JLL's source, there are large real estate corporations that have a land fund of up to 1,000,000m2 of offices in suburban areas with a vision to 2030. If these projects are deployed and implemented, it will take a decade to complete. In the next century, office density will be greatly stretched geographically. Buildings in suburban areas will certainly need to compete in rental prices, with an attractive rental price, companies with a need to use large rental areas in the inner city will have interest and desire to move to save costs. However, projects in the suburbs can only be successful if the infrastructure is improved and the moving from the inner city to the suburbs will not take too much time.
With its important geographical position in Southeast Asia, Vietnam has brought a strong development in industrial real estate, followed by the entry of many large global companies which will offer a good rental demand for the office market, especially the capital city's office market. JLL believes that the office market is still a market segment that will be dynamic and has a lot of growth potential in the next decade.