Rents of Singapore office space rise in Q1, vacancy rate ticks upwards: URA

RENTALS of office space in Singapore’s central region turned a corner in Q1 2021 as rents rose 3.3 per cent quarter on quarter, versus a 3.5 per cent contraction in the fourth quarter of last year.

As vaccination efforts progress and the economy gets back on track, some analysts project that the office rental market will bottom out this year before starting to recover in 2022.

JLL’s head of research and consultancy (Singapore), Tay Huey Ying, reckons the jump in the Q1 2021 office rental index was likely due to offices with a lower rent-point. Ms Tay said: “The search for replacement premises by tenants displaced by the recent spate of redevelopment plans of ageing offices had likely strengthened demand and put upward pressure on the rents for Category 2 offices.”

According to JLL, the average monthly gross effective rents for Grade A CBD (central business district) office space tracked by the real estate consultancy worked out to S$9.78 per square foot (psf) as at end Q1 2021, easing slightly from S$9.81 psf three months prior.

Meanwhile, the data released by the Urban Redevelopment Authority (URA) also showed that prices of office space in the central region contracted 2.7 per cent in Q1 2021, narrowing from the 3.1 per cent decrease seen in Q4 2020. This was led by the fringe area, which saw prices go up 5.8 per cent quarter on quarter, while prices in the central area fell 4 per cent, CBRE pointed out.

At the end of the first quarter, there was a total supply of about 761,000 square metres (sq m) gross floor area of island-wide office space in the pipeline, compared with 770,000 sq m in the previous quarter.

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Net absorption was negative as the amount of occupied office space fell by 19,000 sq m (204,514 sq ft) of net lettable area in Q1 2021, vis-a-vis an increase of 2,000 sq m (21,528 sq ft) in the previous quarter. The stock of office space decreased by 9,000 sq m (96,875 sq ft) in the first quarter, narrowing from a decrease of 13,000 sq m (139,931 sq ft) in the prior quarter.

Leonard Tay, head of research for Knight Frank Singapore, highlighted that the negative net absorption came about largely due to falling net absorption in the downtown core (-312,153 sq ft), Orchard (-32,292 sq ft) and outside the central region (-43,056 sq ft). In the downtown core in particular, some industries are starting to scale down their footprint, while remote working might also have prompted other office occupiers to hunt for space elsewhere at cheaper rents, Mr Tay added.

The island-wide vacancy rate of office space edged up to 11.9 per cent at the end of Q1 2021, from 11.8 per cent at the end of the previous quarter.

Cushman & Wakefield’s head of research (Singapore), Wong Xian Yang, projects that vacancy rates in the downtown core could continue to trend higher as hybrid working grows entrenched, “putting pressure on rents over the short term”. This comes as some banks such as DBS, Citigroup and Mizuho are cutting back on space in the CBD. Mr Wong said: “We estimate that at least 500,000 sq ft of office space in the central area may be released by banks as secondary or shadow space over the next two years.”

Still, Mr Wong expects that office rents should bottom out in H2 2021 as economic activities gradually resume and the vaccination programme helps to contain the pandemic.

Similarly, Knight Frank’s Mr Tay expects office rents will bottom out this year and recover in 2022. Although 1.5 million sq ft of new office supply is due to come onstream in the remaining nine months of 2021 and the banks are scaling back on space, this should be mitigated by demand from the tech behemoths and from private wealth management in the CBD, Mr Tay went on to say.

Barring unforeseen circumstances, JLL’s Ms Tay expects that Grade A CBD office rents could stabilise in H2 2021 and possibly see a recovery by year-end or early next year. She said: “Given the better-than-expected Q1 rent performance, we have upgraded our Grade A CBD office rent forecast for 2021, predicting a milder full-year correction of 3 per cent or less.”

Looking ahead, Singapore’s recovering economy, coupled with a pickup in employment and a tight supply pipeline, should help support demand for offices, CBRE highlighted. “Singapore remains an attractive base as a HQ for global firms,” the real estate consultancy said. “However, it will not be a uniform recovery. The Grade A market is expected to be the main beneficiary as large corporates leverage the pull-back in rents to move to higher quality and better located offices.”