Office rents fall 0.6% in Q3, rental growth projected to slow

Singapore

OFFICE rents in the Central Region eased 0.6 per cent in the third quarter, according to the latest data from the Urban Redevelopment Authority (URA).

Rental growth is expected to be slow going forward, given that a weakening economy will prompt more occupiers to hit the pause button on expansion plans.

The decline was led by rents of offices in the fringe area, which fell 2.8 per cent, while rents in the central area (a part of the Central Region) continued to expand, albeit by 0.4 per cent.

In Q2 2019, office rents in the Central Region were up 1.3 per cent.

Analysts said the weakening in the fringe area could be a result of supply pressures and softer occupier demand, especially amid uncertainties in the business environment.

Tay Huey Ying, JLL's head of research and consultancy (Singapore), said more occupiers are likely to shelve expansion and relocation plans, while remaining rent-sensitive. "This will provide little impetus for rent growth in Q419. Full-year rent growth for Grade A CBD rents is thus projected to come in at below 6 per cent, lower than the 11.8 per cent for 2018."

She suggested, however, that rents could start to strengthen "modestly" towards the end of next year if the external environment stabilises or picks up.

In the short-term, office leasing demand will likely come from the technology sector, while expansion from flexible space operators could be tempered after strong growth in recent years, JLL said.

With rental growth at 7 per cent in the year to date, it is on track to hit Collier's full-year projection of 8 per cent. Head of research (Singapore) for Colliers International Tricia Song said: "We expect rental growth to continue to slow, and forecast a five per cent rental growth in 2020, in line with slower economic growth. Some sectors may have already felt the pressure, and we may see some shadow space emerge from large occupiers, such as financial institutions."

Amid economic uncertainties, one bright spot in the office market is the thinning supply pipeline over the next three years, said Desmond Sim, head of research (South-east Asia) for CBRE. "That said, pre-commitment levels of upcoming projects in the pipeline remain stagnant," he added. "Some landlords of upcoming developments nearing completion will be compelled to fill up their space. This is thus likely to put a cap on rental growth over the next six to 12 months."

So far, Grade A office rents in the CBD are facing increasing friction but are managing to stave off downward pressure, said JLL research. The average monthly gross effective rents of Grade A offices tracked by JLL registered two consecutive quarters of deceleration in rental growth in Q2 and Q3, while rents inched up 0.2 per cent quarter-on-quarter in Q319 to S$10.81 per square foot.

Where vacancy is concerned, Grade A and Premium CBD office vacancy is expected to continue to trend below 6 per cent until 2022, owing to the tight CBD Grade A office supply of 3 per cent of stock per year between this year and 2021, said Colliers.

Meanwhile, after eight consecutive quarters of growth, prices of office space in Singapore's Central Region fell for the first time, dipping 3.9 per cent quarter-on-quarter in the third quarter, versus a 0.9 per cent increase in the previous quarter. This time, it was pulled down by the central area, which fell 4.4 per cent.

"(While) the office sector saw robust investment activity in Q3, deals were located in various sub-markets away from the core Central Business District, (contributing) to the price correction of 3.9 per cent," said Mr Sim.

The island-wide vacancy rate of office space fell from 11.5 per cent as at the end of the previous quarter to 10.6 per cent. The URA data also showed that, as at the end of Q3, there was about 738,000 sq m of gross floor area (GFA) of office space in the pipeline, more than the 732,000 sq m GFA of office space in the previous quarter.