Vietnam faces dearth of high-quality office space: analysts

As Vietnam braces for regional competition for foreign investment, a chronic deficit in high-quality office supply may be further aggravated. Will this open investment opportunities? Analysts from consultancy Avison Young provide an insight into the issue.

An undersupplied office market

In the central business districts (CBD) of Hanoi and Ho Chi Minh City where most international corporations have their head offices located, high-rise buildings crowd the skyline. This landscape would have been hard to imagine in the early 1990s.

But what’s holdiing back the Vietnamese office market now is far more of a fundamental woe: a lingering shortage of high-quality office spaces.

35 years since the issuance of the first FDI certificate for a project in Ba Ria-Vung Tau province in 1988, today there are more than 38,000 FDI projects across the country. Vietnam is, in fact, one of the regional success stories of FDI attraction and the inflow of foreign capital has benefited the country’s office sector over the past couple of decades.

More international investors are looking to Vietnam as one of the alternatives in their supply-chain diversification strategies, and Environmental-Social-Governance (ESG) considerations are increasingly part of their decision making. However, there is a current shortage of high-quality and green-certified offices.

The size of the Vietnam office market is smaller to those in the region. Take Ho Chi Minh City as an example - the key economic hub and largest office market in the country. Its office market size is about one third that of Bangkok and Jakarta, and one fourth compared to that of Manila. Office density in HCMC, however, triples that of Bangkok, Manila, and Jakarta, and more than doubles that of Singapore.

The Vietnam office market has long been a demand-driven sector. When supply falls short, negotiation power falls with the landlords. The average rents for grade A office space in HCMC is two to three times higher than in Bangkok, Jakarta, and Manila.

In an office world post-pandemic where hybrid work and fully remote work seem to be here to stay, these working models have been adopted by only a modest number of employers in Vietnam.

“It is not the working culture here in the country. Vietnamese people embrace in-person collaboration, on-the-job training, and an engaging working environment. That’s why demand for physical office spaces prevails in this market, not only now but also in the years to come,” said David Jackson, principal and CEO of Avison Young Vietnam.

While the office sector in major international markets is struggling with declining occupancy, most grade A office buildings in Hanoi, HCMC, and Danang have maintained occupancy rates of over 85% quarter-on-quarter since the beginning of 2023.

The vacancy rate is even less than 5% at some office buildings with LEED certifications in the CBD of HCMC (Deutsche Haus HCMC, Friendship Tower, etc.).

However, the deficit of green-certified offices in Vietnam will not be tackled in the short term. This means, on the one hand, price pressures will continue to be on tenants’ shoulders. On the other hand, businesses will have to search hard to locate the right offices which meet their sustainability criteria and help them cater to the increasing demand of the workforce for health and well-being in the workplace.

Office revitalization

For Vietnam to elevate its advantages and inch its way into the race for high-quality foreign capital, the revitalization of its commercial real estate sector is inevitable, including the office sector. Take HCMC as an example again, where office transactions in the third quarter of 2023 were mainly relocations, followed by lease renewals.

Relocations accounted for up to 50% of total transactions in the quarter, among which some companies moved from grade B to grade A office buildings, and some relocated to Thu Thiem New Urban Area where two new grade A offices have been put into operation - The Hallmark and The METT.

Normally, when talking about office leasing, most people think it is about finding a suitable space within budget and preferred location for employees to work, meetings, etc. But this is no longer enough. Tenants are increasingly focusing on high-quality projects, innovative spaces, and good operation services to enhance their working environmentss and meet sustainability requirements.

From a market point-of-view, it is noteworthy to track in the time to come whether there are new concession packages, or even penalties if tenants’ ESG requirements are not met. Some flexibility has been included in lease terms recently, including more time for office fit-outs, favourable conditions offered by landlords to retain tenants, etc. New office supply is growing in key cities in Vietnam, yet at a slower-than-expected pace.

This, in a sense, keeps landlords with the advantage, but competitive pressure is on. Enabled by new technologies and the availability of new construction materials, new grade A office projects are going green. Office management teams are now increasingly service-oriented to improve the overall working experience for the community within a building. Thus, the office landlord – tenant relationship has shifted.

“By looking at real estate operations as a service and with a people-centric perspective, we can identify the requirements and preferences of the end-users to make changes and implement new operations that better align with their needs and expectations. This not only results in increased revenue, higher occupancy rates, and improved asset performance for investors and landlords, but also creates real economic, social and environmental value for the wider community,” said Jackson.

Gone are the days of office property evaluation simply being based on indexes of rental demand, occupancy, and rents. Offices can generate above-financial value for both landlords and tenants, all depending on the development and operation strategy. If one can determine the right strategy and optimize operations, office property becomes an excellent investment, offering attractive returns and long-term benefits.

In Asia Pacific and Vietnam, office space remains by far one of the biggest asset classes and will continue to be the core component of a real estate portfolio. Being relatively “new” compared to other regional mature markets, the office segment (and the real estate market in general) in Vietnam offers promising investment prospects thanks to its demand-driven, fast-paced market, a young and growing workforce, and a strong taste for in-person collaboration at work.

Office leasing activities tend to be sensitive to economic fluctuations due to their close ties to tenant employment and budget situations. The current economic slow-down may cause delays to office investment strategies. But understanding the supply-demand, risk-return characteristics, and local market insights will help investors and landlords to increase the resilience of their office assets and to manage the impacts on their properties by business and economic cycles.

And though there are risks in a frontier market like Vietnam, it presents tempting opportunities for smart investors who have the tenacity to do their homework and come in at the right time.

After all, Vietnam has recorded an average growth of 2.5 to 3.5% annually over the past three decades.The country is one of the fastest-growing economies in the region and among the top beneficiaries from the China + 1 strategy.

Last but not least, the country is one of the most promising candidates which is going to join the club of emerging markets.