Ho Chi Minh City is poised to experience a record 29 per cent vacancy rate in Grade A office space by the end of the year, with rentals falling to $53 per sq m per month, driven by an influx of new supply entering the market in the second half, a recent study by Knight Frank has revealed.

In the second quarter, Grade A office rentals saw quarterly and yearly increases of approximately 2 per cent, to $58.92 per sq m per month. The vacancy rate fell to 4.2 per cent from the previous quarter’s 4.9 per cent before new supply started to enter the market.

According to Mr. Leo Nguyen, Knight Frank Vietnam’s Director of Occupier Strategy & Solutions, this surge in rentals largely reflected attempts by landlords to secure tenants into higher rental rates ahead of the arrival of new Grade A supply across Thu Thiem Bridge in the third quarter and in CBD in the fourth quarter.

“With the expected introduction of new Grade A supply in the second half of 2023, landlords will face significant challenges,” he said. “Older Grade A and B buildings, in particular, will experience a notable correction in rents. At the 75 per cent occupancy mark, we anticipate rentals to drop by up to 20 per cent against some buildings’ asking rents.”.

Knight Frank predicts that Grade A rentals will further decrease to $48.50 per sq m per month and $44.50 per sq m per month by the end of 2024 and 2025, respectively. Vacancy rates look set to increase to 32 per cent by the end of 2025, representing a significant shift in the office market.

“We will see a rush to quality in the next two years,” Mr. Leo Nguyen said. “Older Grade B buildings in less-than-prime locations or with basic facilities and property management services will have no choice but to drastically improve their offerings or reduce their rents, and in many cases both.”

Looking ahead, Knight Frank anticipates new tenants to emerge from sourcing and manufacturing companies driven by “China plus one” strategies, which will support net absorption. “However, we are advising our existing tenant representation clients to consider holding onto their current leases for the next six months, if feasible, to leverage the upcoming surge in new supply and rental corrections across the market,” he said.