Having an office in the center of Jakarta is usually an ambition of foreign and local businessmen in Indonesia. An office in Jakarta's Central Business District, the heart of the capital, is a strategic location (located close to the headquarters of numerous other companies that are active in Indonesia) and it adds a certain status to your company even though you will have to battle severe traffic congestion each time you visit or leave the office (but it is fair to say that also in the other parts of Jakarta traffic is immense).
Due to traditionally high demand for office space in Jakarta's Central Business District (CBD) and the generally high-quality office towers that have been developed here, rental prices tend to be much higher in this area. However, a couple of factors have caused declining demand for office space in Jakarta and declining average rental tariffs, specifically the CBD. What are these factors?
Firstly, demand for office space is linked to the performance of the overall Indonesian (and global) economy. When the Indonesian economy is booming, then foreign investors will pour capital into the country, while domestic investors are also more willing to invest in the establishment of a company. This boosts demand for local office space. However, Indonesia experienced a prolonged economic slowdown in the years 2011-2015 and this has made (potential) investors less eager to establish a company in Indonesia, or, in fact, exit the country. Falling commodity prices (and protectionist measures implemented by Indonesian authorities) made the natural resources sector unattractive, while Indonesians' weakening purchasing power implied that households spend less on consumer goods over the 2011-2015 period.
As such, many (potential) investors prefer to wait and see first. But considering economic growth in Indonesia has most likely rebounded in 2016 (the official 2016 GDP growth figure is scheduled to be released in early May) to around 5.0 - 5.1 percent year-on-year (y/y), demand for office space should rebound as well, particularly because Indonesia's economic growth is expected to accelerate to a growth pace of 5.3 percent (y/y) in 2017 and 5.5 percent (y/y) in 2018 and 2019. However, a true surge in demand for office space may not occur this year yet.
Secondly, over the past decade there has been a great surge in office space supply in Indonesia due to the country's robust economic growth and influx of foreign investment. Many property companies invested heavily in office tower projects. However, with office space demand slowing due to the economic slowdown there occurred an imbalance between new supply and demand. The office occupancy rate in Jakarta's CBD dropped to 84.8 percent in full-year 2016 from nearly 90 percent in 2015, and 94 percent in 2014.
In fact, the falling occupancy rate was sharpest in Jakarta's CBD. Also in other parts of Jakarta the occupancy rate fell, but at a softer pace (declining about 1.8 percent on an annual basis).
This oversupply should not last forever, though. Various new office tower projects have been postponed because the high development costs of the project may not justify the project's feasibility. This will somewhat limit the new supply in the years ahead, although property consultants said there is still a total of more than 2 million square meters in office space that is currently under construction in Jakarta and should be completed in the next 3 to 6 years. This could push the occupancy rate in Jakarta's CBD below 80 percent on the near-term.
Rental prices follow the same pattern. Particularly landlords of newly completed office towers are more cautious and more willing to negotiate to meet tenants’ budget. Therefore, there emerged a period marked by declining rental prices.
Thirdly, over the past decade, the real big companies and conglomerates in Indonesia have been constructing their own office towers and therefore stopped renting (a significant size of) office space at other landlords' facilities. They have now become their own landlords.
Fourthly, over the past couple of years, amid Indonesia's economic slowdown, we also detected a trend that companies in the CBD moved to new commercial centers (for example to the TB Simatupang area in South Jakarta) or new projects near the borderline of Jakarta. The motive behind this trend was companies' eagerness to find cheaper rental rates for office space. Considering companies' corporate earnings weakened in the 2011-2015 period, they have been looking for strategies to become more cost-efficient. Meanwhile, a number of companies, especially in the oil and gas industry, ended their activities in Indonesia and thus shut down their offices in the CBD of Jakarta.
Lastly, a relatively new phenomenon in Indonesia is the so-called "virtual office". Many of the new office towers in Jakarta offer this service, meaning they provide communication and address services for a fee, without providing dedicated office space to the company. Many small and mid-sized companies in Indonesia (particularly digital startups) use these virtual offices. Only when business starts to generate decent earnings they will invest in real office space.
What about Office Space Demand in Jakarta in 2017?
Ferry Salanto, Senior Associate Director at Colliers Indonesia, remains pessimistic about demand for office space in Jakarta this year and therefore see the occupancy rate falling to below 80 percent in 2017.
Similarly, Donny Valentino, General Marketing Manager at the GKM Green Tower in TB Simatupang, says demand for office space at this area has been declining since 2015. This relatively new commercial center in South Jakarta is particularly popular among mining as well as oil & gas companies. However, many companies have moved to cheaper office towers (or have gone bankrupt). The GKM Green Tower, which was established in 2014, offers a total of 18,000 square meters of office space to tenants. However, currently 50 percent of this space is empty. Moreover, in full-year 2016 it only managed to attract three new tenants. A 50 percent occupancy rate is barely enough for the landlord to cover operational costs, Valentino added. However, raising tariffs is not an option as tenants can easily move to other office towers considering tough competition. In fact, it may offer discounts in order to attract new tenants.
Due to ample supply and weak demand, prices tend to fall. Colliers Indonesia saw an average 6.2 percent decline in average office rental tariffs in 2016. The property consultant says the average rental tariff for premium/Grade A office space in the CBD area fell to IDR 311,750 (approx. USD $23) m2/month at the end of 2016, while the average rental price for office space outside Jakarta's CBD fell to IDR 225,801 per m2/month. Grade B and C office space saw their average rental prices decline by more than 20 percent last year.
While many other landlords experience the same problem (namely lack of demand for office space), Ciputra Development is an exception to this rule. It claims that its Ciputra World 1 superblock's office tower, established three years ago, currently has an occupancy rate of 94 percent and no tenants have moved over the past year. This year it plans to complete its Ciputra World 2 office tower that will offer an additional 20,000 square meters of office space with a rental tariff of around IDR 350,000 (approx. USD $26) per square meter per month. Reportedly, tenants already signed up for 70 percent of space in this new complex.
Average Rental Tariffs Office Space in Jakarta's Central Business District (CBD):
Source: Colliers Indonesia
Average Rental Tariffs Office Space in Jakarta's TB Simatupang:
Source: Colliers Indonesia
Average Rental Tariffs Office Space in Jakarta's Non-CBD:
Source: Colliers Indonesia