With 2.9 mil sq ft of new office space to enter the market in 2024, vacancy rate to expand

By Nur Hikmah Md Ali
/ EdgeProp Singapore |
Grade-A offices in the Core CBD area have seen resilient demand in office leasing in 2023 due to limited new office supply. (Photo: Samuel Isaac Chua / EdgeProp Singapore)
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The year 2023 saw Grade-A office rents on an upward trend despite high inflation and slow Singapore GDP growth. Gross effective rents went up by 0.4% q-o-q in 4Q2023 to reach $11.90 psf per month, which is at a similar pace with the first three quarters of 2023, according to Tricia Song, head of research for Singapore and Southeast Asia at CBRE.
For the full year, Grade-A office rents grew by 1.7% y-o-y, based on CBRE Research, a more modest pace compared to the 8.3% increase in 2022.
Song attributes the slower growth to investors’ more cautious attitude, which began in 2H2022 amid sustained interest rate hikes and worsening global economic conditions. “As investors stayed on the sidelines due to elevated financing costs, big-ticket office deals experienced a slowdown. Office transactions in the last few quarters mainly consisted of smaller strata office units purchased by non-real estate companies or private individuals for own use or investment,” she observes.
She notes that investor confidence may remain dampened in the near term in 2024 due to the weak economic environment and prevailing high interest rates.

Slower rental growth

The growth in Grade-A office rents last year, though slower than in 2022, may be due to occupiers’ preference to renew their leases instead of relocating. Song says that renewing existing leases, even at higher rents, is more cost-savvy than relocating, which requires high capital expenditure and will incur higher costs due to spiked interest rates.
Office demand in Singapore has also been resilient owing to the steady return to office momentum and the occupiers’ high utilisation rate of offices. Song adds: “As at 4Q2023, prime Grade-A offices have recovered by 14.4% from the lowest point in 4Q2020 during the pandemic.”
The increased demand for office space was coupled with limited supply in the market. According to Song, much of the demand stems from the private wealth asset management, legal, and consumer goods sectors. Vacancy rates have remained tight due to limited supply, down from 4.2% by the end of 2022 to 3.5% by the end of 2023.
Shadow spaces have also declined from the peak of 0.7 million sq ft in 1Q2023 to 0.17 million sq ft by 4Q2023. Shadow spaces refer to excess spaces on an existing lease obligation that a tenant may or may not occupy.
Song says that occupiers gravitated to such shadow spaces to move into high-quality, fitted office spaces in prime areas such as Marina Bay and Raffles Place. “Some shadow spaces were also taken off the market as tech occupiers decided to retain their office premises,” Song adds.
At the same time, 2023 saw only three new Grade-A office launches, including the 30-storey office tower Guoco Midtown, located along Beach Road. The entire Guoco Midtown integrated development project by Guocoland comprises the office tower, three retail clusters (Midtown Square, Midtown Market, and Midtown Common), and two condos (Midtown Modern and Midtown Bay). The development has a take-up rate of between 85% and 90% as of the end of 2023, according to Ashley Swan, executive director of commercial leasing at Savills Singapore.
Caption: Guoco Midtown, the integrated development along Beach Road was one of the three new office developments in 2023, and has achieved 90% occupancy as at end-2023. (Photo: Samuel Isaac Chua / EdgeProp Singapore)
Alan Cheong, executive director of research and consultancy at Savills Singapore, says the office sector has not recovered to pre-pandemic levels. “We are still about 4.1% off 4Q2019 levels, the cyclical high just before the onset of the pandemic in 1Q2020,” he notes.

More office supply in 2024

The supply of new office spaces is expected to increase in 2024. Adding to the supply is the delayed completion of IOI Central Boulevard Towers in the CBD, slated for completion in 1Q2024. The development will have 1.26 million sq ft of office space and 30,000 sq ft of retail, food and beverage spaces. As of August 2023, about 40% of IOI Central Boulevard Towers’ net lettable area has been committed, with another 20% in the advanced stages of negotiation.
New office spaces are also expected in the fringe CBD areas, such as Keppel South Central, which is expected to be completed by the end of the year. The 386,000 sq ft 33-storey commercial tower developed by Keppel Corp is located on the site of the former Keppel Towers in Tanjong Pagar and within the Greater Southern Waterfront.
Over at the decentralised locations in Paya Lebar, potential tenants can keep an eye out for the completion of Labrador Tower and Paya Lebar Green.
Office supply in pipeline by development status and expected year of completion as at end 3Q2023. (Source: URA)
In total, 2024 is expected to see about 2.9 million sq ft of new office space supply — well above the 10-year average (2014 to 2023) of 1.23 million sq ft, Song points out.
According to URA, as of 3Q2023, the projected new office supply in the pipeline stood at 925,696 sq ft in 2025, 710,418 sq ft in 2026, and 914,932 sq ft in 2027.
With the new Grade-A office supply entering the market this year and the potential secondary spaces to surface — office spaces whose lease expires in 2024 and will contribute to primary vacancies — CBRE Research predicts that the overall vacancy rate in the Core CBD market could increase to about 6% to 7%. Song says the vacancy rate also depends on the new projects’ take-up rate.
Caption: In total, 2024 is expected to see about 2.9 million sq ft of new office space supply. (Photo: Samuel Issac Chua / EdgeProp Singapore)

Grade-A rents to outperform

Looking ahead, CBRE Research predicts that Grade-A rents in 2024 will outperform 2023’s growth of 1.7%. With an expected improvement in the Singapore economy, which will benefit businesses and drive leasing demand, CBRE projects that Grade-A office rents will go up between 2% to 3% in 2024.
“That said, we are cautiously optimistic of 2024’s outlook as near-term risks such as high interest rates and higher cost remain, which tend to drive renewals rather than relocations or market expansions,” CBRE’s Song says.
However, Savills Singapore’s Cheong predicts that Grade-A office rents may drop by 2% to 3% in 2024 due to demand remaining the same as in 2023 despite increased office supply.
“Continued economic uncertainty, high interest rates (increased cost of capital) and the state of the tech sector will have a major influence on the office market next year. The consensus is a slower first half of the year with some signs of recovery towards the end of the year.”

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