Technology Forcing Asia's Commercial Markets to Undergo Significant Change

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APAC Real Estate Funds, Institutional Investors to Lead Investment Activity in 2018

According to CBRE's 2018 Asia Pacific Real Estate Market Outlook Report, Asia Pacific's commercial real estate market will be increasingly defined by changing business conditions, the growing influence of technological innovation, and the desire by occupiers for an enhanced user experience. As a result of clear shifts in the market, investors will look to further refine investment strategies to better take advantage of evolving occupier demands in the region.

"With the yield compression era coming to an end, income growth is set to become the major driver of capital value appreciation. Investors will need to adopt strategies that both tap into upward rental cycles in select markets, as well as reaffirm a focus on asset management as a means to increase rental income," said Steve Swerdlow, Chief Executive Officer, CBRE Asia Pacific.

In 2018, CBRE expects to see occupiers continuing to reconfigure office portfolios to include a combination of core premises (owned or lease) and flexible space (co-working or shared) as they respond to changing business conditions. With user experience as the next big workplace trend, companies will focus on more sophisticated workplace design and management in their core premises, such as implementing Activity-based Working, as well as the provision of wellness facilities and other amenities. In the realm of flexible space, companies will increasingly utilize co-working space due to the flexibility it offers around lease terms and size, as well as cost-savings and the opportunities it creates for collaboration and innovation.

Furthermore, the integration of technology innovations into the workplace will continue to gather momentum. As the war for talent intensifies, the workplace and the user experience will take on a more prominent role as companies strive to attract and retain talent.

"The balance of power is shifting in the region's business landscape. Companies are building a greater degree of flexibility and agility into their corporate real estate strategy to ensure they can react quickly to what is often a rapidly changing external environment. User experience in the workplace, and as a consumer, will play a more influential role and become a more prominent focus for occupiers as a result of wider market shifts," said Dr Henry Chin, Head of Research, CBRE Asia Pacific.

The region's retail sector will continue to experience major structural changes. According to CBRE, competition between offline and online marketplaces is moderating, as retailers see scope for building competitive advantage through designing and implementing effective omni-channel strategies. An example includes making greater use of technology such as click-and-collect services and the delivery of in-store purchases.

Additionally, alternative formats such as pop-ups stores or events, and flagship stores with experiential elements will become more important factors for retailers in driving consumer traffic. Landlords will employ stronger focus on retailtainment and securing high-impact tenants capable of increasing footfall and generating publicity.

In turn, retailers' adoption of omni-channel strategies will drive sustainable business growth for third-party logistics and online retailers. With e-commerce companies continuing to expand to new locations to increase market share, operating scale is critical. In China, leading e-commerce companies are pursuing backwards integration by taking ownership of their logistics and delivery functions.

Growing consumer demand for shorter delivery times is set to place higher a stronger emphasis on last mile delivery and generate greater requirements for urban logistics space. Intensifying competition will prompt logistics occupiers to improve efficiency by implementing new technology such as more automated and intelligent manufacturing processes; automated storage and retrieval systems (ASRS); and autonomous delivery systems.

Capital Markets Sector Outlook:

• The investment market will continue to attract strong demand, led by private equity real estate funds and Asia-based institutional investors.

• Strong cross-border capital flows will offset pressure for yield expansion created by rising long-term interest rates. Prime yields will be largely stable in 2018 with expansion or compression limited to a range of 10-15 bps and confined to selected markets.

Office Sector Outlook:

• Demand will remain stable in 2018, supported by robust leasing activity in India and upgrading of premises in Japan.

• Financial and technology industries will retain their position as the major drivers of office leasing demand.

• New Grade A office supply is forecast to rise to an historical high of over 60 million sq. ft.--26% higher than 2017 total--dominated by India and China.

• Limited Grade A rental growth--15 major markets are expecting to see a growth rate of around / less than 2%. Growth will be led by Singapore and Sydney, while Tokyo and Shenzhen will see the onset of rental downward cycle amid oversupply pressure.

Retail Sector Outlook:

• Retail sales are forecast to remain solid in parallel with e-commerce growth.

• Demand will be led by F&B and entertainment-orientated retailers, whilst consumer interest and the wellness trend will drive health & fitness demand from sporting goods retailers, wellness centers and gyms.

• Rental growth is expected to slow in 2018. Growth will mainly be driven by prime properties, with lower quality assets expected to struggle.

Industrial & Logistics Sector Outlook:

• Continued expansion of the e-commerce industry will drive solid demand for logistics space in 2018. China, Tokyo and Seoul expected to see an increase in flight to quality expansion and relocation activities to newer and modern facilities.

• Regional logistics rental growth will be led by China tier I cities, Melbourne and Auckland.