Hybrid, flexible working set to curb Singapore office usage and rents
Meanwhile, tenants’ environmental, social and governance concerns will drive the repurposing of properties and move more occupiers to rightsize
UNLIKE the case in most developed countries, working from home (WFH) full-time and working remotely are still rarities in Singapore, as they are in most of Asia. Hybrid working arrangements, however, where employees need to be in the office for – usually – two days a week, are now commonplace.
This arrangement is often implemented to determine which employees will be on-site on which day of the week. Does this immediately affect office usage in an office-centric culture such as Singapore’s?
Vacancy rates for Grade A Central Business District (CBD) office spaces in Singapore are still rather low, due to undersupply.
Just 655,000 square feet (sq ft) of net lettable area was added to existing stock in 2023 – a minuscule amount, given that this brought the total net floor area of Grade A CBD offices to 34.2 million sq ft. Vacancy rates started at 6.5 per cent in the first quarter of 2023 and peaked at 7.1 per cent in Q3 – due to more shadow space returning to the market – before ending the year at 6.7 per cent.
In the absence of significant new office completions, a lot of these spaces were backfilled by companies moving over from non-Grade A buildings.
The Tripartite Guidelines on Flexible Work Arrangement (FWA) Requests were launched recently, with the requirements to take effect from Dec 1, 2024. How will this affect the market?
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FWAs include hybrid and remote working, which can take place anywhere, do not require an office, and are facilitated by technology.
As many multinational companies in Singapore already practise hybrid working, the FWA guidelines would perhaps apply more pressure on companies which require employees to be in the office full-time, or those which still hold on to the conventional mindset that “if I pay you, I want to see you in the office every day”.
Ultimately, cost management matters and companies cannot just keep expanding and paying high office rents in that regard.
In comes workspace planning. Multinational companies are already seeking advice on such matters, and workspace planning would likely lead to a reduction in office space usage.
FWAs are still good to have because they compel non-progressive companies to evolve with the times – not to retain talent (because disgruntled staff can always vote with their feet), but to give workers greater dignity.
Flight to green
Based on current data, the net take-up of Grade A CBD office space in 2023 was about 370,000 sq ft net lettable area. The pre-pandemic five-year average, from 2015 to 2019, was one million sq ft, while the 10-year average was 1.2 million sq ft.
The slower take-up is symptomatic of companies facing challenging business conditions. The repercussions from Covid-19 lockdowns are still being felt, and supply chains in the region are being rewired. On top of those, hybrid work arrangements have curbed companies’ desire to expand their office footprint.
Top-of-class Grade AAA office buildings have the highest occupancy rate, with those graded A and AA slightly lower – a flight-to-quality pattern seen in all the major global gateway cities.
On the sustainability front in Singapore, there are three Business and Construction Authority Green Mark ratings: Gold, Gold Plus and Platinum. All generic Grade A offices are at least Gold-rated, while most AAA and some AA offices have the Platinum Mark. Some offices in this category even have the Platinum Super Low Energy rating.
Green Mark ratings are not only for the building; individual office units can also obtain a rank. Savills Singapore’s internal office premises, for example, was rated Platinum in 2023.
With the flight-to-quality pattern and green building trends that we are seeing, the demand and supply dynamics will likely evolve towards rightsizing – which will have an impact on office rents – and repurposing.
Time to rightsize
Headcount limitations for Grade A office space in Singapore are governed by the occupant loading consideration in the Fire Safety Code, which assigns an interior office space of 10 square metres, or 108 sq ft, per worker (excluding meeting rooms, pantries and reception areas). The growth of hybrid working means that many tenants have rightsized to smaller offices, so workers have to schedule their time in their official workplace.
For many companies, rightsizing was left on the backburner in 2021 and 2022 as they focused on reawakening their main business lines.
Also, tenants that had signed leases of five or more years in 2018 or 2019 for large floor areas in Grade A CBD buildings have not had a chance to completely change tack, opting to find replacement tenants to take up any unwanted space when their businesses stalled.
It will only be in 2025 that we will see more major leases coming up for renewal. Given the lead time to find and negotiate alternative locations, many tenants will start to explore the marketplace this year. This will include the option of rightsizing – either within their premises or in a new building.
Few tenants will have the requisite budget for relocating and a subsequent fit-out, so we expect rightsizing within current premises to be the norm. Hybrid working patterns, therefore, will help companies pare overheads while placating employees, especially the Gen Zs, with a semi-WFH scheme.
Rightsizing to rent less office space would normally mean paying higher rents per square foot, but tenants are expected to take a harder line during lease negotiations, reining in that increase.
Rents for Grade AAA offices in the CBD should be steady as most are close to full occupancy, while AA- and A-grade properties may well reduce rents to retain their tenants. Overall, we expect Grade A CBD rents to slide 2 to 3 per cent in 2024 – compared with a 1.1 per cent rise in 2023.
Repurposing limits
Repurposing, on the other hand, comes with its own set of challenges and opportunities. Although there are schemes to encourage landlords to repurpose their assets in the CBD, such as the CBD Incentive Scheme, few have done so.
Landlords are concerned about the high land betterment charges they need to pay for repurposing their spaces into, say, residential properties. Moreover, the parts of the CBD that need rejuvenating have plot ratios that limit their height, and thus the view. Spatial separation from buildings across the street is minimal, and older buildings also have much lower ceilings than modern Grade A office assets.
Nevertheless, as tenants from countries with stricter environmental, social and governance standards find themselves unable to rent buildings that are non-green rated, landlords will be forced to repurpose, redevelop, or sell up.
The writer is executive director of research and consultancy at Savills Singapore
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