Decentralisation to dominate office market in next decade

ANOTHER development cycle has passed and all the metrics show Singapore's office market is on another upward cycle. Historically, the Singapore Grade A office market runs on a two-to-three year range rental cycle. This is very much to do with the short-run economic cycles and the tight control by the Singapore government over office land sales.

But there are signs that this trend could be a thing of the past. The CBD Grade A office market will experience a stronger-than-expected recovery post 2022 and the previous high could be tested due to the sharp drop in Grade A office supply.

Strong metrics

Cushman & Wakefield's prime CBD Grade A office rental growth accelerated to 3.8 per cent quarter-on-quarter in Q2 2018, the fastest pace of growth in 17 quarters since Q1 2014.

A similar picture was painted by the Urban Redevelopment Authority's office price index, which rose by 1.9 per cent in Q2 2018; this was a faster clip than the 1.3 per cent growth experienced in the first quarter of this year. The acceleration of price growth reflects the bullish views of investors over the Singapore office market.

Islandwide office stock was boosted by 646,000 square feet in the second quarter of 2018, with the completion of Frasers Tower. Despite the increase in office stock, the islandwide office vacancy rate continued to trend downwards from 12.5 per cent to 12.2 per cent. Net absorption, which measures demand for office space, increased five-fold by 797,000 sq ft in the second quarter, compared with the increase of 151,000 sq ft in the previous quarter. This has brought the total net demand islandwide for the first half of 2018 to 947,000 sq ft, even higher than the 646,000 sq ft for the whole of 2017.

Tech and co-working firms continue to drive demand. Alibaba-backed e-commerce player Lazada renewed and expanded its space by 3.6 times in AXA Tower, occupying approximately 109,000 sq ft in total.

Ride-hailing player Go-Jek could be going on an expansion spree, as it aims to employ "hundreds of staff" in Singapore to support its launch here. The co-working sector continues to have legs as companies seek to boost space efficiency.

Still no new Grade A office in sight post-2022

Despite the strong rental growth for prime Grade A office space in the CBD over the past five consecutive quarters, the most recent half-yearly Government Land Sales (GLS) Programme did not place any commercial site in the CBD.

The last commercial GLS site with mandatory office component that was awarded by the state, was the plot along Beach Road which was sold to GuocoLand last year; the new project on the site is expected to come on-stream in 2022.

In the latest GLS Programme, the government re-introduced a Marina View plot which was slated for office use three years ago but subsequently removed it. It is now a white site with hotel and residential components, limiting office supply further.

To make up for the slack, the government has ramped up supply in decentralised locations such as Punggol Digital District and Labrador Park.

According to the project details released by URA in the first quarter of this year, approvals for development of 688,000 sq ft of office space and another 1.5 million sq ft of business park space have been obtained.

Similarly, it has been reported that a commercial building will be built on top of an underground electrical substation in Labrador Park, which can leverage Google's Asia-Pacific headquarters nearby to attract more businesses to the future Greater Southern Waterfront area.

In addition, the vision to make Jurong Lake District the second CBD is still on the cards, with or without the high-speed rail (HSR).

Based on URA's Master Plan 2008, 500,000 square metres of office space is slated for Jurong over the next few decades. This translates to a supply pipeline of around 1-2 million sq ft every decade.

With all the supply hitting the market, it probably makes sense for the land leases of transitional office buildings, developed on sites with short land tenures, to expire naturally, so as to boost demand for new decentralised office developments in the coming decade.

The authorities sold seven transitional office sites, with 15-year leasehold land tenures, in the 2007-2011 period to quickly resolve a shortage of office space before the Global Financial Crisis.

Indeed, the seven transitional office buildings, which are mostly in the fringe locations such as Scotts Road and Mountbatten, contribute to almost a million square feet and this is expected to be taken off the market between 2022 and 2026 as their land leases expire.

As the government ramps up the supply of office sites in decentralised areas in the coming years, companies currently in transitional offices could then relocate to these new decentralised office projects.

The decentralised office strategy looks set to dominate the office market over the next decade or so. The proportion of CBD office supply could continue to fall in the coming decade, giving rise to a much stronger rental recovery after the next wave of office completions in 2021-2022.

It is now a highly probable scenario that prime CBD Grade A office rents will reach an average S$16 per square foot per month by 2030.

Singapore continues to offer diverse options for office occupiers. The Grade A office market has now expanded to other locations at the city fringe and suburban areas; Buona Vista's The Metropolis is a good example. As Singapore's transport network expands, non-CBD locations in the state planner's decentralisation blueprint will gain traction and offer an attractive alternative office location.

We envisage decentralised areas to account for nearly 30 per cent of Singapore's total office stock from 2023 and onwards, double the 14 per cent share as at end-Q2 2018. Conversely, the CBD's share of office stock is forecast to shrink from 86 per cent to 71 per cent.

June Chua is executive director of commercial leasing and Christine Li is senior director of research at Cushman & Wakefield Singapore.

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