Tourists check the model of the Taipei 101, a 508-meter high commercial building, in Taipei on August 27, 2019. (Photo by Sam YEH / AFP) (Photo credit should read SAM YEH/AFP via Getty Images) SAM YEH

TAIPEI — High office rentals in Taiwan look like they're here to stay. The office space market in the self-ruled island is already overcrowded, in part thanks to reshoring — or the practice of bringing production and manufacturing for homegrown companies back to the country of origin. Now, with the uncertainty from the trade war between the U.S. and China still lingering after more than a year, rents for offices in the densely populated capital of Taipei could continue to climb as Taiwanese firms consider returning home. "The main reason is because there's been a limited supply of new buildings," Tony Chao, managing director at property consultancy Jones Lang LaSalle Taiwan, told CNBC in Mandarin. Take-up rate of Grade A office space — or offices in premium locations — has been robust in recent years. Vacancy rate has currently fallen to about 3% from over 10% just three years ago, Chao told CNBC. Vacancy rate in 2020 will likely drop even lower, to an average of 1%, Chao predicted. According to Chao, the availability of Grade A office space has already been constrained, as many tenants renting properties that are more than 20-years-old have been looking for newer places. There has also been a trend in companies consolidating their corporate spaces to newer, swankier buildings in central locations, and a rise in co-working spaces in similar locales.

Trade war effect

Taiwanese firms have for years set up businesses and manufacturing facilities on mainland China, but many have been returning home in recent years due to rising costs in China, as well as incentives by the Taiwanese government — even before the U.S.-China trade war. The bilateral trade fight has also spurred further reshoring as tariffs slapped on exports from China eat into profit margins. While Taiwanese firms coming home from China is not a key driver for the property boom, it has further tightened supply, said Chao. In 2018, the rent for Grade A office spaces in Taipei rose about 3% year-on-year to 2,728 New Taiwan Dollars ($90.40) per ping — which is equivalent to 35.6 square feet. Rental prices rose another 1.8% by the third quarter of 2019, according to the consultancy. Despite the U.S.-China trade war, the Taiwanese economy has been resilient this year in part due to a trend of Taiwanese businesses returning home to navigate the tariff fallout. That's given the current administration under President Tsai Ing-wen some political leverage ahead of January 11 general elections. The strong demand for Taiwanese real estate contrasts with slower global leasing demand where the total net take-up rate dropped 5% by the second quarter of 2019, noted Jones Lang LaSalle in its third quarter report this year. The suppressed appetite globally was in part due to dampened market sentiment and the fallout from the U.S.-China trade dispute, the consultancy noted. Still, Chao pointed out that even though office property rentals in Taiwan have seen a revival in recent times, they are on average still lower than in 2000 — indicating an undervalued market.

Reshoring operations

It's not just homegrown companies that are moving to Taiwan — international firms are doing the same. A few high profile technology investments into Taiwan have caught the eye of the market. In October, Taiwan approved a $850 million investment by tech giant Google, whose parent is Alphabet, to expand the company's data center. In April, social media giant Facebook opened its new Taiwan headquarters. According to Chao, there are a few other international names moving into the Taiwan market from China. Taiwan has for years dominated the tech supply chain, most notably in the form of Foxconn, a major Apple supplier.