What’s next for offices in industrial buildings?March 4, 2013 / By
Industrial developments in Singapore must comply with the 60/40 rule, which requires 60% of their total GFA to be used for industrial activities and allows the remaining 40% to be ancillary space, such as meeting rooms and common facilities. However, local authorities have reported a growing number of tenants flouting the rule by dedicating more than 60% of their properties’ GFAs to commercial use, which has partly caused industrial rents to rise, riling many bona-fide, cost-conscious industrial tenants. Given this, since late 2011, the authorities have introduced several policy changes and measures to address these issues, which include increasing the monitoring of current industrial tenants that may be breaking the 60/40 rule.
Anecdotal findings showed that the non-compliant tenants were mainly from small businesses including professional service industries. The authorities have served some of these tenants notices, which demand compliance with the 60/40 rule. Furthermore, a few tenants were served eviction notices.
However, evicting non-compliant tenants on a massive scale with short notice would create large socio-economic repercussions. Under such conditions, market distortions would follow the resulting surge in office demand and increased vacancy in industrial space. Also, business owners are likely to have limited options for relocation. Currently, most office developments are within the city and regional areas, with floor plates catering largely to medium-to-large-sized firms. This causes the majority of small businesses, which typically look for smaller spaces outside of prime office areas to benefit from low rents, to face a mismatch in space expectations as such requirements are lacking in the current office landscape. Some examples include small firms involved in creative designing and architecture works. Thus, many small businesses have chosen to operate within industrial buildings in suburban areas to benefit from the significantly lower rents of these properties compared to those of office buildings.
The lack of small commercial space to serve this sandwich segment has put the government in a difficult situation, requiring the needs of businesses to be balanced without distorting the market. To bridge the gap between the space offered in the current industrial and office markets, the government could hence consider looking into the feasibility of increasing the supply of suburban office developments – with space features designed for the growing pool of small businesses. The provision of such small suburban offices could hence provide businesses a viable alternative while reinforcing the definitions of space to be used for industrial and commercial uses.
Before a feasible space option becomes available, a “temporary” development levy could meanwhile be imposed on current non-compliant tenants, while providing them the option to remain within their industrial premises. The levy would act as a fee paid by commercial tenants for the enhanced use of industrial space. Although a levy would inevitably lead to higher costs for businesses, commercial tenants within industrial developments are nevertheless given a temporary alternative to operate in while the government avoids the risks of a market imbalance that would result from strict eviction terms.
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