Strong central region office rent growth figures in Q4, full-year 2022 belie signs of caution in market

BENEATH the robust headline figure showing a 5.1 per cent quarter-on-quarter growth in the Urban Redevelopment Authority’s (URA) central region office rental index for the fourth quarter of 2022, signs of caution are already setting in for the Singapore office market.

Some observers argue that the rental increase in Q4 2022 is the result of relatively tight supply rather than buoyant leasing demand.

Edmund Tie’s head of research and consulting Lam Chern Woon said: “Through 2022, the overall office stock has been declining. In fact, islandwide, 86,000 square metres was removed from the market in 2022, the first decline since 2007.”

The office market remained tight in Q4 2022, with the islandwide vacancy rate declining to 11.3 per cent, from 11.7 per cent in the previous quarter, he noted.

Net new demand of islandwide office space, as reflected in the change in occupied space, turned positive to the tune of 44,000 sq m for the whole of 2022 after two years of negative demand.

However, the point to note is that the demand grew at a slower pace of 9,000 sq m in Q4 2022 following two consecutive quarters of 24,000 sq m growth. (In the first quarter of 2022, net new demand was -13,000 sq m).

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Lam attributes the slowdown in leasing demand in Q4 to “some firms taking to rightsizing their corporate space requirements”.

Tricia Song, head of research for South-east Asia at CBRE, highlighted that based on median rentals signed in Q4 2022, the pace of rental increase for prime buildings in the Downtown Core and Orchard planning areas (termed Category 1 office space by URA) moderated to 0.8 per cent quarter-on-quarter in Q4 2022, from a 5.6 per cent q-o-q rise in the third quarter of 2022.

“This could be due to rightsizing activity and consolidations among selected tenants, resulting in a potential increase of office space available for lease,” she added.

“Towards the end of 2022, CBRE Research observed that office leasing demand began to slow for the larger occupiers, especially those in the tech sector.”

According to Edmund Tie’s Lam, Singapore office demand was mainly driven by the tech sector in the first half of 2022, and picked up by the co-working and finance sectors towards the end of the year.

JLL Singapore’s head of research and consultancy Tay Huey Ying said that mounting macroeconomic headwinds have started to dampen market confidence, prompting an increasing number of occupiers to put real estate expansion and relocation plans on hold. This slowed leasing activity and rent growth in Q4 2022, ending five consecutive quarters of q-o-q rent growth acceleration in the monthly gross effective average rental value for JLL’s Grade A CBD office basket.

“Occupier caution that set in during Q4 2022 is likely to intensify in 2023 as the downcast global and domestic economic outlook is expected to weigh down sentiments. Leasing activity is projected to be dominated by renewals and rightsizing while expansions will likely be confined to occupiers with immediate needs to accommodate the significant increase in headcounts in 2022 to cope with business growth,” Tay added.

Given this scenario, she expects a more subdued office leasing market this year, which will “substantially ease upward pressure on rents”. JLL forecasts that the monthly gross effective rents of its basket of Grade A CBD offices could rise by less than 1 per cent in 2023 following the 9.4 per cent spike in 2022.

Lam of Edmund Tie also points to the market having to grapple with incoming supply from the completion of two major office projects in the Singapore downtown in 2023, as well as an increase in shadow space availability in the market. (Shadow space refers to excess space on an existing lease obligation that a tenant would like to give up by finding a replacement tenant for the landlord).

“Notably, Guoco Midtown, which received its Temporary Occupation Permit in January 2023, has seen healthy leasing commitments, while IOI Central Boulevard Towers (expected to be completed later this year) has achieved at least 30 per cent pre-commitment (from Amazon).”

Partly mitigating the effects of the new supply would be the removal of older offices for redevelopment, he noted.

On a brighter note, Knight Frank Singapore’s research head Leonard Tay said: “Office leasing demand in the year ahead is likely to be sustained by corporates shifting business functions from other parts of Asia with Singapore as a flight-to-safety destination as uncertainty grows.”

With these sources of demand and with relatively tight supply in the Central Business District this year, Knight Frank forecasts that the gross effective average rental value of its prime CBD office rental basket is likely to increase by around 3 per cent for the whole of 2023 after increasing 5.5 per cent last year to end at S$10.69 psf a month at Q4 2022. This is barring any further substantial pre-termination or reduction of space from technology companies.

The 5.1 per cent q-o-q rise in URA’s Singapore’s central region office rental index in Q4 2022 is a bigger gain than the 2.1 per cent increase in Q3 2022.

For the whole of 2022, the index climbed 11.7 per cent after rising 1.9 per cent in 2021.

URA data released on Friday (Jan 27) also showed that its price index for office space in the central region posted a q-o-q gain of 3.7 per cent in Q4 2022, contrasting with the 2.7 per cent drop in Q3 2022.

For the whole of 2022, the price index dipped 0.1 per cent after slipping 5.8 per cent in 2021.

Tay of JLL said that given expectations of muted office rental growth in 2023, and “exacerbated by the steep spike in interest rates that has driven the spread between yields and borrowing costs into or close to the negative territory, we expect office assets to come under some re-pricing pressure in 2023”.