1

Determinants of Office Space Choice

Sing Tien Foo and Joseph OoiDepartment of Real Estate, NUS

Wong Ah Long and Patrick LumSuntec City Development Pte Ltd

15 December 2005

CRESTimes Vol. 5, No. 1 Light at the end of tunnel? Office Market in Singapore

Upbeat in Office Market New Centroid in Future Downtown Core

Bid rent functions and locationalequilibrium

Rent

Distance from CBD

b1

b2

b3

R

d*

r*

Equilibrium for the firm is at d* distance from CBD, where the rent gradient, R, touches the lowest possible bid rent function, b2.The equilibrium paid by the firm is r*

Emergence of sub-centers

Agglomeration economies argument become less convincing as firms seem to locate their various divisions in different locations

Banks with HQ in CBD, and back-room operations moved to regional centres

Increase in the use of information & communications technology by firms also reduces the need for face-to-face contactsDiminishing effects set-in when city size /boundary expands to a critical size Subcenters are formed and draw away firms from the CBD

2

Advancement of ICT

Ball, Lizieri and MacGregor (1998)ICT replaces the need for face-to-face interactions among firms in city centre

Gibson and Lizieri (2001)ICT-enabled new work practices like corporate downsizing, delayering, outsourcing, hot-desking reduces the space required by firms

Expedite the decentralization of firms to subcentersEvidence of subcenters in Glasgow and Edinburgh (Dunse, Leishman and Watkins, 2000 and 2002)

Office Submarket in Singapore – Marina Center

By historical reason, city centre of Singapore evolves near the mouth of Singapore RiverCBD took shape to the south of the riverStretching between two MRT stations from Raffles Place to Tanjong Pagar (see figure)In the 1970s, reclamation of the Marina Centre The land parcel was sold in 1978 – current Marina Square developmentIn 1988 – land parcel on which Suntec City is built was soldRivaling Raffles Place CBD

Suntec City

Source: URA & Suntec City Development Limited

Downtown Core Downtown Core Development Guide Plan AreaDevelopment Guide Plan Area

Shifting in the CBD centroid to the North-East fringe

“We have within Marina Centre a strong magnetic pool which will challenge Raffles Place some day. In five years time, we want (Marina Centre) to take over Raffles Place.”Mr Wong Ah LongChief Executive Officer, Suntec City Development Limited“Suntec City looking for tenants for Tower 4”Business Times Singapore, 28 November 1996

Office Market – Old vs News” Business

“Some buildings (in Marina Centre area) have been positioned as alternatives to those in Raffles Place. These buildings are also newer and designed with a sense of space and ambience.”Mr Tay Kah Poh, Knight FrankTimes Singapore, 11 November 1999

Marina Centre - appealing to financial institutions

“Buildings in Marina Centre meet the needs of corporations, especially financial institutions, who prefer offices with large floor plates so their workplaces are not spread over too many floors. Such buildings are preferable over the office blocks in Raffles Place which, because they were built on smaller land parcels, have smaller plates. Moreover, Marina Centre has attracted ‘a critical mass’ of financial institutions.”Mr Chris Fossick, CB Richard Ellis“Office Market – Old vs News”Business Times Singapore, 11 November 1999

3

Vibrant new commercial center bustling with activities

“Among the attractions to financial institutions and other tenants of the Marina Centre location are buildings with large column-free floor areas and facilities like malls and hotels, with plenty of eating and entertainment outlets – unlike Shenton Way, which is a ghost town by night”Rashiwala, K. (1999), “Migration to Marina area continues”Straits Times, 18 July 1999.

Suntec City

11 tycoons from HK got together to invest in S$2.3 billion Suntec City project“Location, Location, Location”The management turn around the inherent location disadvantage of the project“Connectivity, Connectivity, Connectivity”Promote Network externality Embrace ICT – Suntec’s IT wavesBuild up the reputation of the “Asia’s Vertical Silicon Valley”Facilities Service Provider (FSP)

Suntec City – “A networking city”

“Increasingly, companies are more willing to pay a premium for an environment that provides tremendous opportunities and potential growth, than for a location that offers cost savings. Besides paying for increasing networking capacity, many companies do not mind paying extra rental fees if they can attract the right people and partners.”

Facing new economy challenges

“Suntec City in Singapore has been successful in luring IT firms to the development, initially through offering broadband fibre-optic network to occupiers and then through the networking opportunities available as a result of the concentration of IT firms in the development.”Dr Amy Khor, Knight FrankBusiness times Singapore, 13 April 2000

Survey Design & Responses

A mailed questionnaire survey was conducted covering all firms in Suntec CitySampling design

Firm population = 514After removing duplication and vacant units, a sample of 342 firms was short-listed for the surveyResponse rate = 17.8% or 61 firms responded

Profile of responding firmsBusiness typeLease lengthStaff size

Profile of Responding Firms

Finance, Insurance, Real Estate &

Banking Services15% Information

Technology, Media, Telecommunicatio

n & Dot-com businesses

20%

Professional Services

(Accounting, Medical and Legal)

5%

Trading, Wholesales, Retail

& Delivery Services

25%

Others (Consultancy, Oil, Pharmaceutical,

Government)35%

4

Alternative / Comparable Office Locations

Raffles Place32%

Shenton Way/Robinson

Road/Cecil Street27%

Beach Road/North Beach Road/Bras

Basah Road/Selegie Road Fringe

2%

Regional Centres2%

Orchard Road Corridor

5%

Marina and Millennia

submarkets12%

Anson Road/Tanjong

Pagar8%

None12%

What are other office locations evaluated by your firms before locating in Suntec?

Desirable Attributes of Suntec Office

20.2%

16.0%

11.7%

10.4%

20.2%

6.1%

9.2%

4.9%

1.2%

0% 5% 10% 15% 20% 25%

Competitive Rent

Surroundng hotel, shopping and conventional amenities

Accessibility to major highways

Being close to financial center at CBD

Prestigious office buildings

Large floor plate & flexible office layout

Presence of world-class companies

Broadband and wireless connectivity

Pro-business and responsive management

What are the office attributes that attract your firm to locate in Suntec?

Less favorable factors in Suntec Office

33.9%

17.4%

23.1%

14.9%

2.5%

7.4%

0.8%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Insufficient parking lots

Traffic congestion

Distance from MRT station

Expensive rent

Distration by surrounding amenities

High maintenance & service costs

Limited room for future expansion

What are the factors that are considered unsatisfactorily for Suntec office?

Empirical Results

36 office determinantsScale of 1 to 5, and 5 indicates the most important factor and 1indicates the least important factorMean score approach

Average score = 3.566Standard deviation = 0.365

Most favorable factorsImage and prestige of office location (4.082)Accessibility by public transports (3.983)Flexibility of lease structure (3.982)Responsiveness of management & maintenance team (3.967)Ample parking lots (3.967)

Least favorable factorsProximity to competitor and firms in similar business line (2.881)Proximity to port and airport (2.533)

Principal Component Analysis

Varimax rotation techniqueReduce the factors to 8 latent principal componentsExplain 75% of the variances of firms’ office choiceThe 8 Factors include:

“Pro-business environment,”“branding and image,”“broadband and automation system,”“lease structure,”“workplace quality,”“accessibility,”“international connectivity,” and “agglomeration economies”

Building, architecture design, surrounding amenities, parking facilities were dropped

Cluster Analysis

Group sample firms into homogeneous group based on firms’characteristics and their preference of network externalityCriteria used in the two-step clustering analysis

Business type (cbus)Current office space size (size)Length in the current office (length)Preference to be close to firms in same business line (line)Willingness to pay a premium for the network effect (prem)Ratio of professional & management staff to total staff (RMP2emp)

4 clusters derivedUsed as dependent variables in discrete choice model

5

Clustering of Firms and their Characteristics

Cluster Description of firm characteristics 1 Firms in this cluster in general have higher proportion of managerial,

executive and professional staff in the office, and they are firms that find it highly important to be located close to businesses in the similar line. They are willing to pay a premium to get connected to a network of competing and complementary firms and enjoy the agglomeration economies.

2 Majority of the firms are relatively new and they have moved into the current office premises for less than 3 years

3 Firms occupying medium size office space with floor area between 2,501 sqf and 5,000 sqf, and majority of them have been in the existing space between 4 to 6 years.

4 Firms with the longest occupancy history. Most of them have been occupying the existing office premises for more than 6 years, and they are firms with the lowest proportion of managerial, executive and professional staff in the office

Multinomial Logistic Regression Model

Three factors are significant in the office space decisions for the 4 different firm clusters

Pro-business environmentBranding & imageAgglomeration economies

Cluster 1 and cluster 2 firms place significant importance on branding & image of the officeThey are less critical about the pro-business environment vis-à-vis cluster 4Cluster 1 firms consider consider agglomeration to be importantFirms in cluster 4 (those in the building for more than 6 year) found the pro-business environment to be highly desirableFirms in cluster 3 (2,501-5,000 sqf and 4-6 years in the office building) rely ICT to cut down the need for face-to-face contacts

ConclusionAssumptions of agglomeration economies are not strictly binding in the firm’s office choice decisionResults shows that determinants of office location vary across different firms Firms that occupy more than 6 years in the office will find the pro-business environment to be favorable

They are firms that are likely to have established strong networks with firms in the buildingThey are firms with broader/layered organization structure

Firms with flatter organization structure or those with high proportion of professional & managerial staff found the face-to-face contacts to be highly important

Thank you