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S'pore office rents seen easing until 2016 at least
A YEAR ago, property consultants were predicting that Singapore office rentals would continue rising in 2015, albeit at a slower clip than last year.
However soon after 2015 started, the mood dampened quickly on the back of weak demand - especially from financial institutions, the key constituent of CBD office demand - and ahead of a surge in office completions next year.
Savills Singapore now estimates that for this quarter, its Overall CBD Grade A average monthly rental value for a typical 5,000 sq ft lease is S$9.36 per square foot, down 5.3 per cent from a year ago. This contrasts with a 14.4 per cent increase last year.
JLL estimates a 14.4 per cent full-year drop in its CBD Grade A average office rental value to S$10.32 psf as at Q4 2015 - contrasting with last year's 16.1 per cent hike.
To put things in perspective, last year's rental increase was on the back of tight supply rather than strong demand. But ahead of a big surge in office completions next year - including at Duo, Marina One and Guoco Tower - and the sudden weakening in demand, office rents are ending lower this year.
"It is a year where the market surprised almost overnight and turned south without much warning," said Savills Singapore research head Alan Cheong. "The supply coming on stream is so evident to even non-property specialists that it is difficult to explain to tenants why rents will not collapse. However we believe that whilst rents will be soft, they will not come crashing down because landlords are financially strong and the market for Grade AAA and AA offices are an oligopoly."
Most consultants expect rents to keep easing till next year at least, with some like Mr Cheong expecting the slide to continue to 2017 and possibly even 2018.
As for next year, Chris Archibold, international director and head of markets at JLL, said: "The key challenge is that we have 2.8 times the average office supply coming on stream being met by a market that is experiencing half the 10-year average annual demand." Moreover, there is a substantial amount of space available for lease at Mapletree Business City II, which is also completing next year, that will compete with the new office supply, he added.
Summing up the sudden turn in the office market, Mr Archibold said: "The CBD office market in 2015 saw an initial rise in rents as vacancy tightened. Sentiment was buoyed during this period by technology and social media firms expanding rapidly and seeking out new office space in late 2014/early 2015. South Beach and CapitaGreen were key benefactors of these trends.
"However, the positive momentum tailed off as the market started to price in the effect of the unusually large amount of new office supply coming on stream in 2016. This, coupled with lower than average take-up and the surrender of office space by financial institutions, has been weighing down on rents."
In similar vein, CBRE managing director, brokerage, Singapore, Moray Armstrong, said: "The dampening impact of the upcoming supply wave was accelerated ahead of physical completion of projects that are scheduled to come on line only from Q3 2016 onwards ... The downturn in the energy and commodities sector and continuing challenges in the financial sector have certainly impacted office demand from these important industries."
JLL's Mr Archibold highlighted other global macro trends that have negatively impacted business sentiment and consequently Singapore office demand this year: the lacklustre US economy, instability in the eurozone and China's weak economy. Some occupiers chose to move out of the CBD to suburban offices where rents are cheaper - such as Daimler and mechanical engineering services firm Beca's relocation to Westgate Tower in Jurong.
On a positive note, new media and technology companies have been on an expansion wave this year - some within the CBD (for instance Facebook and LinkedIn), with others entered into big leasing deals to move to business parks in the suburbs from CBD offices, such as Google, Mr Archibold noted. Mr Armstrong of CBRE too highlighted that the "IT and, in particular, the e-commerce sectors are expanding and contributing meaningfully to take-up in both the office and business park markets".
Savills's Mr Cheong estimates this year's Grade A CBD office demand, or net take-up, at around 600,000 sq ft - down from 701,000 sq ft in 2014 and 960,000 sq ft in 2013. This year's demand reflects a 45 per cent drop from the 10-year average annual figure of 1.1 million sq ft. "Based on our model forecast, the estimated net take-up for 2016 is 747,000 sq ft, followed by 1.67 million sq ft in 2017."
He predicts that the CBD Grade A vacancy rate will rise from 4.3 per cent this quarter to 10.2 per cent in Q4 2017 before easing to around 9 to 10 per cent in Q4 2018.
JLL forecasts that its overall CBD vacancy rate will climb from 6.1 per cent this quarter to 11.6 per cent in Q4 2016 before abating to 9.5 per cent in Q4 2017. It estimates islandwide net take-up of private-sector office space at about 695,000 sq ft for this year - or half the 10-year average annual (2005 to 2014) figure of 1.37 million sq ft based on government stats. On the supply side, for this year, JLL estimates the net increase in islandwide completed private-sector office space will be just 61,640 sq ft, after factoring in the (temporary) removal of office stock from the market such as at GSH Plaza, which is undergoing a revamp.
Next year, JLL expects some 3.35 million sq ft of offices to be completed on the island, which would be more than twice the 1.2 million sq ft 10-year average.
JLL expects the average monthly rental value of its CBD Grade A office basket to fall 8.9 per cent from Q4 2015 to S$9.40 psf in Q4 2016, before recovering to S$9.65 psf by Q4 2017. Mr Archibold expects the contraction in office rents to be ameliorated, especially in 2018 and 2019 as the global economy recovers and there is only a moderate amount of office space coming on stream at the time, based on the current supply pipeline.
Savills's model, on the other hand, predicts that the rental slide will continue till 2018. It expects its Overall CBD Grade A average office rental to retreat 8.7 per cent next year, followed by further declines of 8.8 per cent in 2017 and 6.3 per cent in 2018; its Q4 2018 rental forecast is S$7.31 psf, compared with S$9.36 psf this quarter. "Although we expect rents to continue to soften in 2018 over 2017, there is a possibility that the market may surprise us with a mild recovery in 2018, assuming there is no global cataclysmic event and no big release of government land sale sites for office developments," said Mr Cheong.
Tenant retention is topmost on the minds of landlords. "In terms of interest in the new developments," said Mr Archibold, "some occupiers are waiting to see if the market becomes more tenant-friendly and options open up."
"That said, certain savvy tenants that need space for critical infrastructure such as back-up air-conditioning or generators, or for branding such as naming rights or signage - ie, elements of a development that are limited in supply - are still active in order to ensure they can secure what they need," he revealed.
Mr Armstrong acknowledged that there are some very attractive deals on offer to occupiers as developers of new office projects compete to secure leasing commitments and build occupancy. "Tenants that are in a position to capitalise will be able to secure lease benefits beyond just the financial impact. Landlords will be highly flexible for sure, but the window of opportunity for tenants may close sooner than many expect."
For more of BT's year-in-review stories: bt.sg/review_15