OFFICE rents in Singapore's Central Business District (CBD) likely peaked in the first quarter of this year, with further softening becoming more pronounced as more tenants opt for cheaper decentralised offices and financial institutions consolidate amid an uncertain economic outlook.
Key projects seen weighing down office rents in the Raffles Place and Marina Bay area in the second quarter were Asia Square in Marina Bay as well as CapitaGreen in Raffles Place.
According to some consultants, there was an aggressive marketing strategy to fill up Asia Square amid a potential divestment of Tower 1 by BlackRock Inc. The sale is said to have drawn bids from Norway's sovereign wealth fund, CapitaLand and Keppel Land.
"As Asia Square Tower 1 is going through divestment exercise, it is in the landlord's interest to fill up the building quickly," said Cushman & Wakefield research director Christine Li.
In Marina Bay, Grade A effective direct rents - which are based on per floor basis and account for rent holidays and other incentives - slipped to S$11.01 per square foot per month (psf pm) in Q2, down from S$13.22 psf pm in Q1, Cushman & Wakefield estimated. In Raffles Place, rents dipped to S$10.66 psf pm in Q2 from S$10.92 psf pm in Q1.
Data released by the Urban Redevelopment Authority (URA) showed that office rents in the Central Region weakened by 2.6 per cent in the second quarter, after rising 0.6 per cent in the first quarter.
Ms Li is projecting a decline of 2 per cent in overall CBD prime office rents for each quarter in the second half, with the Marina Bay area more susceptible to rental fluctuations since some 58 per cent of the tenants there are banking tenants - of which many are reviewing their space requirements - compared with about 49 per cent in Raffles Place.
Savills head of research Alan Cheong said that he is expecting another 3-5 per cent slide in prime office rents in the CBD in the second half compared with the first half.
According to Colliers International, cost-conscious companies that do not require a CBD front office are making plans to move out of the financial district to reduce their occupancy costs.
Germany's automotive firm Daimler Group, for instance, is moving from Centennial Tower in City Hall to about 55,000 sq ft at Westgate Tower in Jurong East with an estimated 30 per cent rental savings. Insurance company Great Eastern Life is also taking up close to 33,000 sq ft at Westgate Tower. Mechanical engineering services firm Beca has reportedly leased 26,000 sq ft at Westgate Tower, relocating from Anson Centre in Shenton Way.
Knight Frank head of consultancy and research Alice Tan noted that the current lack of demand from potential large-space tenants, adding that with the possible deterioration in market sentiment, "downside risks on Singapore's rental growth could become more pronounced going forward".
A report released by Knight Frank last week showed a 1.4 per cent drop in prime office rents in Raffles Place and Marina Bay based on 2,500 to 5,000 sq ft of net lettable area and flagged that Singapore's prime office market is at a stage of accelerating decline in the rental cycle.
"As global and domestic business conditions turned cautious, leasing activities in Singapore's office market are showing signs of weakening," Ms Tan added. "Typical large space occupiers, in particular financial institutions, are holding back their expansion plans or are going through a consolidation phase by relocating to alternative locations or consolidating their offices to fewer locations in the CBD."
Ms Li noted that a growing amount of shadow and secondary space is easing the supply crunch this year as some large bank tenants give up more space in Raffles Place and Marina Bay.
For tenants whose leases expire next year, they will be "spoilt for choice" as about four million sq ft of prime office space and 2.3 million sq ft of business park space (out of which 1.1 million sq ft comes from MapleTree Business City II) will be completed, Ms Li added.