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Tight supply rather than demand driving up office rents
SINGAPORE office rents have continued to rise this quarter, taking the full-year growth past that for last year, amid shrinking vacancies. (see infographic)
CBD office rents are projected to continue climbing in 2015, albeit at a slower clip in the choicest segment. While the current landlord's market is set to continue next year, there is an air of caution among office-leasing agents.
"We are slightly concerned that the market performance appears to have been driven more by the tightness of availability rather than an abundance of demand," said CBRE executive director (office services) Moray Armstrong.
Since last year, demand has softened. Chris Archibold, head of markets at JLL, said: "Net absorption is low compared to the 20-year average of 1.5 million sq ft; 2013 was 1.2 million sq ft and 2014 looks like it's coming in at about 900,000 sq ft to one million sq ft."
"Financial institutions, which have been the largest contributor to office space demand over the past 10 years, are not expanding and in some cases have been giving up space," he added.
Marcus Loo, executive director of office services at Colliers International, highlighted that "a decent share of the leasing transactions this year stem from firms playing 'musical chairs', moving from one building to another to lower their rental expense.
"Tenants are still trying to come to terms with rising cost of premises, which is forcing some to look at lower-cost alternatives or buildings that would enable better space utilisation".
Looking ahead, CBRE's Mr Armstrong said: "The prospect of slower economic growth would inextricably lead to lower take-up levels."
And with supply continuing to remain tight over the next couple of years, the scene is set for further rent growth in the short term, though downward pressure will start to emerge as the time draws nearer to a big pick-up in office project completions come 2017.
For the fourth quarter of 2014, JLL estimates a 4.2 per cent quarter-on-quarter rise in the average gross monthly rental value for Prime Grade A CBD office space to S$12.44 per square foot (psf). This would be the same pace of growth as Q3 2014 and translate to a full-year increase of 19.8 per cent - double the 9.3 per cent appreciation for 2013.
Colliers International too estimates a full-year 2014 increase of 15.5 per cent for its Premium Grade Raffles Place/New Downtown average rental value, nearly double the 8 per cent growth last year.
Its baskets for various office micromarkets across the island also reflect rent appreciation for Grade A and B space this year. The increases vary widely though, from 3.6 per cent for Grade B offices in Orchard Road to 12.2 per cent for suburban Grade A offices.
Next year, Colliers predicts further rent growth of 11.5 per cent for Premium Grade Raffles Place/New Downtown offices, before the figure tapers off in 2016 with a 0.9 per cent rise. In all other micromarkets, too, the property consulting group forecasts rents will continue climbing next year before either plateauing (for Grade A space in all micromarkets except Shenton Way/Tanjong Pagar) or falling (for Grade B space in all areas) in 2016. In that year, Grade A rents in Shenton Way/Tanjong Pagar are forecast to dip.
Mr Archibold, who expects JLL's Prime Grade A CBD rents to appreciate 7 per cent next year, said: "Rents will continue to go up in the early part of next year because of the low vacancies. There is bound to be some pressure on rents based on the new supply that will be coming in from early 2017. Exactly when that will kick in is difficult to ascertain. However, based on previous history, it would be around 12 months before completion of the next wave of supply."
"This has to slow down rental growth and could potentially have a slightly negative impact on rents," added Mr Archibold.
CBRE estimates a 15.4 per cent full-year 2014 rise in its Grade A (CBD Core) average monthly rental value to S$11.25 psf after last year's 1.8 per cent gain. "We anticipate rental growth particularly in the early part of next year, with the pace of increase likely to slacken later in 2015 as the impact of the upcoming future supply becomes apparent," said Mr Armstrong. Full-year 2015, the increase could amount to 10-15 per cent.
The office rental appreciation has been accompanied by a fall in vacancy rates, reflecting a tightening of supply. CBRE's Grade A vacancy rate has eased from 9.2 per cent in Q3 2013 to 4.3 per cent in Q3 2014.
On the supply front, by some accounts, so far this year the net increase in completed office space (taking into account withdrawal of stock) has amounted to around 970,000 sq ft, with hardly any new offices completed in the financial district.
CapitaGreen and South Beach Tower are expected to receive Temporary Occupation Permit (TOP) by year-end, taking the 2014 net increase in supply to around 2.2 million sq ft - ahead of 1.76 million sq ft in 2013, 1.62 million sq ft in 2012 and 1.97 million sq ft in 2011. However, new completions next year will be just about 350,000 sq ft, followed by 1.3 million sq ft in 2016 before rising to 2.8 million sq ft in 2017.
M+S, the developer of the Marina One and Duo projects, has told BT the estimated TOP dates for the office components of the two developments will be in 2017. Despite the anticipated supply gap next year, some relief is expected from the nearly one million sq ft of offices estimated to become available in 2015 when tenants move out of existing buildings to their new offices, DTZ pointed out in an earlier report.
Net increase in demand in the first nine months of this year has been sluggish at around 760,000 sq ft (based on JLL figures). Full year, the figure could be around 900,000 to one million sq ft, below the 1.4 million sq ft average annual take-up between 2009 and 2013. "Next year, I think demand will be similar to 2014; I do not see demand from the banks coming back in 2015," said Mr Archibold.
Said CBRE's Mr Armstrong: "We will likely be reliant on the key sectors that have been driving the market this year - notably insurance, IT including e-commerce, professional services and Asia-Pacific financial institutions. We are at this stage still applying only hope value to the return of US and European banks to the Singapore office market. . ."
While the current landlord's market will prevail in the short term, a number of landlords are securing longer tenancies that go past 2017 to minimise the impact of new completions. Said JLL's Mr Archibold. "This is being done selectively for sizeable tenants, relative to the size of the building." Tenants are offered more attractive rental rates to encourage them to lock in for a longer lease.
Mr Armstrong, too, said: "Landlords will likely be more motivated by tenant retention in the medium term. We foresee an increase in early restructuring of existing leases possibly with incentives to tie in longer-term lease deals. Landlords that may have future vacancy arising from loss of tenants to new developments will need to be pro-active in order to mitigate against voids."