As corporate real estate leaders navigate a challenging business landscape, the Asia-Pacific offshoring market emerges as a beacon of opportunity, poised to burgeon to USD 185.1 billion by 2032. This exponential growth trajectory is anticipated to spur an additional demand for office spaces ranging between 4.7 and 5 million square meters annually over the next three years. Insights gleaned from Knight Frank’s Asia-Pacific Horizon: Harnessing the Potential of Offshoring illuminate the region’s allure as a premier destination for offshore services and delineate pivotal shifts within the industry.
On the global stage, the offshoring market is projected to soar to USD 544.8 billion by 2032, reflecting an impressive compound annual growth rate (CAGR) of 8.5%. While North America retains its stronghold, Asia-Pacific is poised to register the highest CAGR globally, at 10.2%.
Capitalizing on Global Trends: Asia-Pacific Ascends as Offshoring Epicenter
Tim Armstrong, Global Head of Occupier Strategy and Solutions at Knight Frank, underscores the unprecedented growth momentum witnessed by the Asia-Pacific offshoring industry. Leveraging global economic dynamics, the region has solidified its position as a thriving nucleus for offshoring activities. Within this landscape, India, the Philippines, Malaysia, and Vietnam have emerged as premier offshoring destinations worldwide.
“Companies grapple with a myriad of challenges, encompassing cost management, sustainability, and talent acquisition,” remarks Tim. “Amidst a backdrop of heightened emphasis on performance, efficiency, and innovation, alongside cost containment, Asia-Pacific offers a compelling proposition with substantially lower operating costs, nearly 70% less than the US, as per Knight Frank research. For every square foot of office space, occupiers stand to realize significant savings, translating to an impressive 54% reduction in annual occupancy costs compared to mature markets.”
Tim further elucidates, “The global office sector is undergoing a paradigm shift, characterized by a discernible flight to quality. This entails a surge in demand for sustainable, amenity-rich, and flexible office spaces. With waning confidence in the office sector, particularly pronounced in the US, occupiers are increasingly turning towards Asia-Pacific. Premium office spaces in city centers, coupled with ESG-compliant buildings, remain highly coveted, as corporates zero in on achieving 2030 net-zero targets. Moreover, the region’s burgeoning talent pool, marked by its educational prowess, versatility, and multilingual proficiency, positions it at the vanguard of service delivery excellence.”
Resilience and Allure of Asian Offices
Against the backdrop of escalating cost pressures, global corporations are fervently seeking cost-effective solutions to streamline expenses, with offshoring emerging as a strategic imperative. Within Asia-Pacific, these markets stand out as prime offshoring destinations globally.
Offshoring: A Driving Force Igniting Office Demand
Christine Li, Head of Research, Asia-Pacific at Knight Frank, underscores the pivotal role played by offshoring in galvanizing office demand across the four key markets. “Offshoring activities have emerged as a linchpin fueling office demand in these dynamic hubs, precipitating a notable expansion in their footprint,” observes Christine. “We anticipate the allure of cost savings to catalyze offshoring endeavors further. This trend has been discernible in India, where leasing transactions involving Global Compatibility Centers (GCCs) surged by 10% from 2022 to 2023, capturing a 35% market share. A similar trend is observed in the Philippines, Malaysia, and Vietnam, underscoring the instrumental role of offshoring in driving office space demand.”
Teh Young Khean, Executive Director of Office Strategy & Solutions at Knight Frank Malaysia, sheds light on Malaysia’s ascent as a burgeoning offshoring destination. “Malaysia’s offshoring landscape, encompassing Shared Services & Outsourcing (SSO) and Business Process Outsourcing (BPO), has witnessed remarkable growth, particularly since the mid-90s, buoyed by the advent of major international players such as Intel, IBM, DHL, and Fujitsu,” remarks Teh. “This growth trajectory gained momentum with the government’s Multimedia Super Corridor (MSC) initiative, culminating in the establishment of a vibrant Global Business Services (GBS) sector. Presently, Malaysia hosts 607 companies, with 58% comprising foreign direct investments, including prominent entities from the Forbes Global 2000 and Fortune 500 lists.”
Teh further elucidates, “The introduction of the Malaysia Digital (MD) status by the government has widened the spectrum of building options for GBS players, catalyzing a surge in GBS establishments across diverse sectors. This expansion underscores Malaysia’s proactive approach to fostering an enabling environment conducive to business expansion and innovation.”
Market Dynamics: Asia-Pacific Office Markets Poised for Recovery
According to Knight Frank’s Asia-Pacific Q4 2023 Office Highlights report, the region’s office rents registered a modest decline of 2.4%, with the average vacancy rate witnessing a marginal uptick of 1.24% in 2023. Despite ongoing challenges, there are nascent signs of market sentiment improving, albeit against a backdrop of economic volatility.
Christine elaborates, “Occupiers remain attuned to cost considerations amidst a challenging macroeconomic milieu. However, corporate entities continue to prioritize offshoring functions, fueling headcount expansion in regions offering growth opportunities and cost efficiency. Consequently, occupiers are channeling their focus towards bolstering office demand in strategic locations, while recalibrating real estate requirements elsewhere. This strategic reallocation of resources serves to mitigate rental declines in markets like Vietnam and the Philippines, with rents even strengthening in Malaysia and India despite elevated vacancies.”
Outlook for Prime Office Markets: Key Offshoring Centers in Asia-Pacific
Indian Tier 1 Cities:
Marginal improvement in vacancy rates throughout 2023, buoyed by robust demand, notwithstanding a surge in supply. The escalating share of GCCs in total leases is poised to bolster office market demand in 2024.
Manila:
Despite a double-digit decline in rents in 2023, the vacancy rate remained resilient, with demand stemming from traditional and outsourcing firms embracing flight-to-quality and flight-to-cost strategies.
Kuala Lumpur:
A robust flight-to-quality trend underpins resilient rental growth in prime office stock Kuala Lumpur amid constrained new supply. Notably, tenants capitalized on the opportunity to migrate to state-of-the-art buildings, driving rental escalations.
Ho Chi Minh City:
Rents in Ho Chi Minh City continue to recalibrate in response to a deluge of completions, with select landlords adopting more competitive rental pricing strategies to maintain occupancy levels. Substantial supply additions are anticipated in 2024, exerting further pressure on rents.
Keith Ooi, Group Managing Director of Knight Frank Malaysia, concludes on a resolute note, “The Malaysian government’s steadfast commitment to advancing the nation’s digital ecosystem through strategic initiatives such as the National IoT Strategic Roadmap and MyDIGITAL underscores its unwavering resolve to spearhead digitalization endeavors. Incentives like the National Fourth Industrial Revolution (4IR) Policy and Industry4WRD are geared towards accelerating digital transformation, fostering industry evolution, and enhancing supply chain efficiency. The recent establishment of the Digital Ministry in January 2024 underscores the government’s unequivocal dedication to propelling digitalization initiatives. Malaysia stands poised at the vanguard of the digital revolution, propelled by a steadfast commitment to innovation and progress.”
