Singapore office rents expected to soften after 2.3% rise in Q2
Capital values increase 1% on increasing demand for strata-titled office space
Ry-Anne Lim
OFFICE rents in the central business district (CBD) are expected to moderate further. This comes after downtown office rents rose more slowly in the second quarter of 2023 amid tight market conditions.
Data released by the Urban Redevelopment Authority (URA) on Friday (Jul 28) showed that the rental index for offices in the Central Region rose 2.3 per cent in Q2, from the 5.1 per cent rise in the first quarter.
This is the seventh consecutive quarter of rental increases since the third quarter of 2021, with the office market being held up by “tight market conditions”, said Tricia Song, head of research for South-east Asia at CBRE.
Much of the recent rise came from the fringe area, where office rents rose 8.1 per cent quarter on quarter, said Wong Xian Yang, Cushman & Wakefield’s head of research for Singapore and South-east Asia. In contrast, central area rents went up by just 1.5 per cent in Q2.
“As flight-to-quality persists in a restrictive financing environment, some occupiers might be increasingly opting for higher-grade – but more cost-effective – options in the fringe area,” he noted.
Median rents in Category 1 buildings – a proxy for prime CBD offices – rose by 6.7 per cent to S$11.49 per sq ft (psf) per month, from the marginal uptick of 0.2 per cent in the previous quarter.
A NEWSLETTER FOR YOU
Tuesday, 12 pm
Property Insights
Get an exclusive analysis of real estate and property news in Singapore and beyond.
The Category 2 segment, comprising the remaining office space in Singapore, logged a similar 6.7 per cent increase, to S$6.19 psf per month, outpacing the 1.8 per cent hike in Q1.
URA’s price index for office space inched up by 1 per cent in Q2, after staying flat in the previous quarter. Capital values were likely pushed up as interest in strata-titled office space grew, particularly with recent rule changes for commercial properties, according to Edmund Tie head of research and consulting Lam Chern Woon.
Tay Huey Ying, JLL’s head of research and consultancy, predicts that office demand will soften for the rest of this year – especially since supply is set to rise with the completion of IOI Properties’ Central Boulevard Towers in Marina Bay, and as shadow stock swells. (Shadow stock is refers to properties that are unoccupied but not yet on the market.)
As at end-June 2023, supply totalled 927,000 sq m in gross floor area of offices in the pipeline – around 10.8 per cent more than pipeline supply as at end-March.
Islandwide, vacancy slipped 0.4 percentage points quarter on quarter to 10.8 per cent as at end-June. This came as the amount of occupied office space rose by 30,000 sq m, from an increase of 21,000 sq m in Q1.
Total office stock fell by 7,000 sq m in Q2 this year, reversing the previous quarter’s increase of 14,000 sq m.
Although current vacancy rates are low, total shadow space remains “quite high” among prime buildings in the Downtown Core, said CBRE’s Song. This space may materialise as higher vacancy in the future.
“Global macroeconomic headwinds…and continued corporates’ cost-cutting exercises could result in shadow spaces increasing. This could compete with new-office supply, which is still largely uncommitted,” she added.
JLL’s Tay said that leasing enquiries, particularly from large space users, have been “noticeably scarce” since the start of the year.
Edmund Tie’s Lam noted the higher demand for smaller fitted-out spaces under 5,000 sq ft, relative to demand for spaces in the 15,000 sq ft range.
Future leasing activity is likely to be driven by occupiers with “smallish requirements”, although some “ongoing negotiations for mid-to-large pre-leasing deals for projects under construction may conclude in the coming months”, said Tay.
Other drivers of demand include flexible space operators, as well as multinational corporations and family offices that have recently entered the market, said Lam.
While hiring intentions for Q3 have picked up – with the strongest interest in the energy, utilities, finance and real-estate sectors – he believes that firms will continue to watch costs and reduce space needs.
Demand is therefore expected to lag supply in the shorter term, and this might pressure landlords of buildings with high vacancy rates to “soften their rent stance to attract or retain tenants”, said Tay.
“JLL does not rule out the possibility of the average monthly gross effective rents of its CBD Grade-A office basket entering into correction mode in the second half of 2023, and dragging down full-year growth into the mildly negative territory.”
Wong from Cushman & Wakefield is optimistic about the Central Region. He predicts that occupiers might turn to short-term renewals instead of large-scale relocations or expansions amid constraints on capital expenditure.
“Given that rents tend to be higher for shorter leases, this could help to support Central Region office rental growth and occupancies when demand dwindles,” he explained.
Central rents could trend higher in 2024, backed by a “steady back-to-office momentum” and fuelled by deferred relocation or expansion plans alongside falling new office supply, he said.
Copyright SPH Media. All rights reserved.
