HCMC to see a five-fold increase in office vacancy

March 27, 2023
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Knight Frank, the world’s largest privately owned real estate consultancy has revised down its forecast in a study into the Ho Chi Minh City office market showing that the city is set for a record five-fold increase in Grade A office vacancy by year-end.

Grade A:

The Q1 2023 report shows a stable vacancy rate of 4.9% in Grade A office space, essentially the same as the 5.0% of the previous quarter. However, the more dramatic finding suggests that with 131,068 m2 of inventory entering the market in the next 12 months, this is set to rise as high as 25% by Q1 2024.

Noting that this level of vacancy has not been seen in the southern metropolis since 2011, Mr. Leo Nguyen, Knight Frank Vietnam’s Director of Occupier Strategy & Solutions, remarked that landlords had “best brace themselves” for more trying times as we move entirely into a tenant’s market.

“We are going to see shifts in Grade A supply that bring clearer distinctions of CBD, Thu Duc City, and Saigon South, especially with new supply of just under 100,000 m2 coming online very shortly in the CBD and Thu Duc City, respectively – all offering extremely competitive asking rents.”

The company is further predicting a 17.4% decrease in Grade A rentals by the end of 2025. Current rentals for Grade A space average US$57.78 per m2 per month, but Knight Frank expects this to drop to US$53 per m2 per month by year’s end, to US$49.50 per m2 per month by the end of 2024 and US$47.50 per m2 per month by the time the sun sets on 2025.

“The increase in supply sets up a fiercely competitive environment among landlords for tenants looking for Grade A office space in central Saigon,” Leo continued. “Building owners will need to look at improving standards across the board, in terms of governance, environmental footprint, and overall standards and property management and maintenance as they face competition from new buildings in District 1 and notably immediately across the bridge in Thu Thiem.”

Grade B:

The shift toward a tenant-friendly market has happened faster than most analysts expected, with Grade B office space a precursor of what the wider market can expect.

Currently sitting at 12.3% vacancy – up 4.4 percentage points over Q4 2022, largely led by Vietnamese enterprises, particularly affected by finance, real estate, trading and tech either consolidating floor space, returning entire buildings, or moving to secure single-use buildings of their own. The segment is set to welcome 295,053 m2 of floor space to the market by 2025, nearly doubling the vacancy level to 23%. This is the highest Grade B vacancy rate the market has seen in over a decade which Knight Frank expects will stay above 10% for 12-24 months.

Once again, asking prices are ripe for adjustment to reflect the changing market dynamics. Currently averaging US$33.69 per m2 per month, Knight Frank expects this to fall to US$29.50 per m2 per month by the end of this year, US$27.50 per m2 per month by the end of 2024 and US$25.50 per m2 per month by the end of 2025. All told, this represents a 24.3% decrease in 27 months.

Looking toward the next few years, Leo commented: “We have been predicting a shift to an occupier-favourable market for the past two quarters, and it is here now. Certainly, no one can recall the last time that Ho Chi Minh City reported that a quarter of its Grade A and B office space was unoccupied, making this an excellent time for occupiers to speak with their brokers about future terms and rental rates.”