What's behind the surprise 3.5% drop in URA's office rental index in Q3

MOST property consultants were surprised by the 3.5 per cent quarter-on-quarter drop in the Urban Redevelopment Authority's (URA) central region office rental index in Q3 2021, which came after the 1.3 per cent rise in Q2 2021.

Consultants attribute this to a "flight-to-quality" by tenants resulting in a two-tier market, pointing to URA's data showing that Category 1 office buildings - covering the better-quality buildings in the city area - posting the second consecutive q-o-q increase in the per square foot monthly median rental. In contrast, the monthly median rental fell in Q3 for the remaining office space in Singapore - or Category 2.

A seasoned market observer - while acknowledging the ongoing flight-to-quality as some tenants choose to relocate from older office buildings into newer, better-located ones and take advantage of current soft market conditions - highlighted another reason for the continued decline in office rents for Category 2 buildings.