(SINGAPORE) The phenomenon of shadow office space is making a comeback. Tenants who find themselves stuck with excess space are looking to dispose of it by finding sub-tenants or replacement tenants.

Many committed to the space with more headcount in mind. Now they find they can make do with less.

'The current round of shadow space does not necessarily reflect downsizing by occupiers but is more likely a case of occupiers having catered for additional space with growth plans in mind, but some of these have not come to fruition given the current economic slowdown,' said Jones Lang LaSalle's (JLL) head of markets Chris Archibold.

'Shadow space is fairly normal when market sentiment turns down,' he added. Most industry players too are not spooked by the current level of such space.

A seasoned office leasing agent who declined to be named said: 'Sometimes this space is quite fluid. In some cases, occupiers who are looking for replacement tenants have contingency plans; they can re-absorb the space and put it to alternative uses.'

By some accounts, there could potentially be about 90,000 sq ft of shadow space at Marina Bay Financial Centre's (MBFC) Tower 2. The 50-storey tower, which was completed last year, has about one million square feet of net lettable area. It is part of MBFC's first phase, which includes the 33-storey Tower 1, with 620,000 sq ft of offices.

Nomura, which has a lease at MBFC's Tower 2 for five floors or about 125,000 sq ft, is understood to be actively looking to sublet a floor or 25,000 sq ft. Barclays Capital is said to be considering doing the same for two floors totalling 50,000 sq ft. Barclays has a lease for 350,000 sq ft or 14 floors in the tower.

BT understands that Maquarie Group, which has leased three floors or about 75,000 sq ft in the same block, recently sublet about 10,000 sq ft on part of the 16th floor to private equity group Xander and is on the lookout for a tenant for another 5,000 sq ft on the same floor.

Over at Millenia Tower in the Marina Centre location, Citi is said to be exploring for replacement tenants for some of the 60,000 sq ft-plus of space on which it has a lease until 2013. This is the result of Citi's phased move from Centennial and Millenia Towers at Millenia Singapore to Asia Square.

So it appears there could be about 150,000 sq ft of shadow office space in the market today.

During the worst point in the previous office downcycle in 2008-2009, there was about 800,000 sq ft of shadow office space, recalls Mr Archibold.

Looking ahead, Savills Singapore's director of commercial leasing Agnes Tay expects the current stock of shadow space to climb next year. 'Companies are likely to be conservative and therefore may want to look at cost-saving measures. One solution would be to return space back to the market,' she added.

Many landlords would allow tenants to either sublet space or give up existing leased space provided they can find replacement tenants - subject to the landlord's terms and conditions, one of which would be that there is no detrimental financial impact to the landlord.

JLL's average monthly rental value for Grade A space in Raffles Place (including Marina Bay) rose 0.5 per cent to $10.20 per square foot in Q3 2011 over the preceding quarter. Between Q4 2010 and Q3 2011, the increase was 9.1 per cent. Mr Archibold expects the Q4 figure will be flattish or even down 1-2 per cent from Q3 - with downside next year given the economic uncertainty in Europe.

For the whole of 2010, the rental level rose about 20 per cent.

Putting in perspective the phenomenon of shadow space, some market watchers say a more pressing issue is the stock of space in older office buildings being vacated and returned to the market by tenants moving to new buildings.

Assuming about one million sq ft of such secondary space makes it way back to the market next year (including the space that DBS will give up at Shenton Way when it moves to MBFC Tower 3), that could add about 1-1.5 percentage points to islandwide office vacancy, estimates JLL's Mr Archibold.

Based on Urban Redevelopment Authority figures, as at end-Q3, the islandwide office vacancy rate was 11.7 per cent.

Source: Business Times