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Surge in secondary office space seen as tenants relocate
THE stock of secondary office space here is set to increase as newly completed office projects trigger bouts of relocations among tenants with expiring leases. Based on estimates by Cushman & Wakefield, the stock of secondary space in 2015 and 2016 could amount to some 1.13 million square feet.
Of this, some 680,000 sq ft of secondary space will become available this year - close to half in Shenton Way/Tanjong Pagar and 32 per cent in Raffles Place and Marina Bay.
Cushman & Wakefield research director Christine Li flagged that this could be "one of the highest in recent history" in Singapore, where secondary office space typically ranges from 300,000 to 500,000 sq ft annually.
Another 450,000 sq ft of secondary office space could stream in next year, with the bulk coming from Marina Bay and Shenton Way, she projects.
But the surge in secondary space should not be cause for concern, given that demand for office space has outstripped supply for three consecutive years since 2012, Ms Li said. Taking last year as an example, the 700,000 sq ft of net supply (new office space less stock taken off the market due to asset enhancements) coincided with a net absorption of 770,000 sq ft (new space taken up net of space occupied previously).
Ms Li, the former head of research and consultancy at OrangeTee, noted that tenants are drawn to new buildings with better technical specifications. An increase in secondary space could be a result of healthy leasing demand in newly completed office buildings.
"Going forward, as more of such secondary space becomes available in the market, we could see more 'flight to quality' movement by tenants who were previously in the suburbs and priced out of the CBD," she added.
Ms Li observed that floor sizes of at least 50,000 sq ft forms 60 per cent of the available secondary space in 2015-2016, suitable for most businesses as only a handful of tenants require more than 100,000 sq ft of space.
Cushman's estimates are derived by tracking tenants whose leases expire in 2015 and 2016 and who have signed new leases elsewhere. These would include, for instance, AON's release of 35,000 sq ft at Mapletree Anson to relocate to SGX Centre 1, and Vodafone's release of space in Straits Trading Building to move into Asia Square Tower 2.
Desmond Sim, CBRE head of research, South-east Asia, pointed out that the majority of take-ups in recent projects CapitaGreen and South Beach Tower are existing tenants playing musical chairs. "When the music stops, there will be pockets of space left behind," he said.
The 34-storey office tower at South Beach developed by City Developments received its temporary occupation permit (TOP) this month with 80 per cent commitments while CapitaGreen, a joint development by CapitaLand, CapitaCommercial Trust and Mitsubishi Estate Asia, received TOP in December with close to 70 per cent commitment.
"The negative spin is that the pre-commitment of new buildings has sacrificed some of the older buildings," Mr Sim said. Net new demand, which stems from the expansion of existing tenants and new entrants, is currently low, he observed.
But so far, the absorption rate of secondary office space in Singapore has been healthy, according to Mr Sim. An increase of such space is unlikely to cause a spike in Singapore's office vacancy rate, which stood at 4.7 per cent in the fourth quarter based on CBRE estimates.
In CBRE's computation, an office space is considered occupied once the lease is signed while URA - which reported a 10.2 per cent office vacancy rate islandwide in Q4 2014 - considers the space occupied only after the tenant moves in.
For now, the tight supply situation will allow rents to inch up in the first half of this year before tapering off in the second half, consultants say.
Ms Li of Cushman & Wakefield is projecting a 1.5 per cent to 2.5 per cent increase in prime office rents in Shenton Way/Tanjong Pagar, and a 3-5 per cent rise in Grade A rents in prime Raffles Place this quarter.
"There would appear to be a lack of options for tenants wishing to sign new leases in 2015," Ms Li said. Some 500,000 sq ft of the 700,000 sq ft of net new supply in Grade A CBD space this year comes from the South Beach project, which has already obtained high leasing commitment. The remaining 200,000 sq ft is coming from smaller strata office projects such as Oxley Tower and PS100, which may not be suitable for firms in the finance and tech sectors that require larger floor plates.
Come 2016, the situation will turn the corner and rents could start to moderate when over four million sq ft of new office space in the CBD come on stream, Ms Li projects.
Chris Archibold, head of markets at JLL, noted that while rents have been driven up by tight supply, demand has stayed below the 20-year average net absorption of 1.5 million sq ft.
While expecting rents to come under pressure next year, Mr Archibold said it is hard to project demand based on historical net absorption given Singapore's vulnerability to external factors as a global city. "The change in dynamics has always been outside factors," he said.