CBD office tenants resist further rent hikes

By
/ EdgeProp Singapore
|
October 11, 2019 4:56 PM SGT
On the back of a weakening economic outlook, most occupiers will exercise more caution regarding their space needs and real estate cost (Picture: Shutterstock)
Some office tenants in the CBD are resisting further increases in rents, following nine consecutive quarters of increase in Grade-A office rents in the business area, according to a market report by Colliers International. Cumulatively, CBD Grade-A office rents have risen by 27% since 2Q2017, driven by tightening supply.
Average Grade-A office rents in the CBD have climbed 1.5% q-o-q to $10.08 psf per month (pm) in 3Q2019, which is slower than the 3% increase recorded in the previous quarter. But it is a jump of 9.6% y-o-y, says Colliers.
The consultancy notes that on the back of a weakening economic outlook, most occupiers will exercise more caution regarding their space needs and real estate cost. This could curtail further sharp increases in office rents over the coming quarters.
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Tricia Song, head of research for Singapore at Colliers International, says: “We are starting to see ‘flight to value’ in the market where some tenants eschewed higher lease renewal rate and opted to relocate to another building with a lower rent. Whether this trend would become more widespread will depend on market dynamics and the state of the economy.”
She adds: “Broadly, we expect rental growth to continue to slow in line with slower economic growth. Some trade sectors may have already felt some pressure. We may see some shadow space emerge from large occupiers, such as financial institutions.”
In 3Q2019, the strongest rental growth was recorded in the Shenton Way/Tanjong Pagar micro-market which grew by 2.8% q-o-q to $10.31 psf pm, followed by premium Grade-A office rents in Raffles Place/New Downtown which climbed 2.6% q-o-q to $12.27 psf pm. The rental performance of these two areas was driven by tight vacancies and new office space, notes Colliers.
Demand from the flexible workspace sector continues to drive office take-up rates. WeWork is set to lease the entire former HSBC Building at 21 Collyer Quay in 2Q2021. It will fill the space left vacant when HSBC moves out. New entrant East Japan Railway Co also opened a 13,000 sq ft co-working space at Twenty Anson in August this year.
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Rick Thomas, head of occupier services in Singapore at Colliers International, says: “[The flexible workspace sector] now accounts for about 5% of CBD Grade-A space in Singapore. We are positive on the sector’s prospects as it provides more flexibility to occupiers and offers an alternative real estate solution amid rising uncertainty in the business environment.”
However, the tight availability of space in the short term may limit the sector’s growth to some extent, he says. New supply of Grade-A office space in the CBD will remain limited until 2022, and an average of 678,000 sq ft per year is likely to come online over the next two years.
Grade-A CBD office rents are likely to grow by 8% y-o-y this year, moderating from the 15% increase in 2018. Rents will continue to grow at a slower pace of 5% in 2020, says Colliers.
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The last quarter also saw office investment transactions climbing 11.9% q-o-q to $2.91 billion in 3Q2019, bringing the rolling 12-month volume of office and mixed-use commercial transactions to $8.71 billion.
Notable transactions last quarter include the sale of the office component at DUO Tower and the retail mall DUO Galleria, the sale of 71 Robinson Road, and Anson House. The unveiling of the planned Greater Southern Waterfront during the National Day Rally likely boosted investor sentiment in the Shenton Way/Tanjong Pagar areas, where 71 Robinson Road and Anson House are located, says Colliers.
The optimistic valuations achieved from major transactions last quarter have brought the average imputed capital value of Grade-A CBD office properties up by 0.7% q-o-q to $2,512 psf. Meanwhile, average cap rates remained unchanged at 3.15% to 3.5%.
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