Grade-A office rental growth surpasses 2021 levels, but sentiment turning cautious: CBRE

SINGAPORE (EDGEPROP) - Rents for Grade-A offices in the CBD have exceeded levels registered in 2021, according to data compiled by CBRE Research. In a Dec 16 press release, the firm states Core CBD Grade-A office rents have reached $11.70 psf per month as of end-2022. This brings full-year rental growth to 8.3%, exceeding the 3.8% growth recorded in 2021.

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The strong growth was supported by the addition of Guoco Midtown, which boosted islandwide net absorption to 1.15 million sq ft in 2022 – 3.6 times higher than 2021’s net absorption of 0.32 mil sq ft. Correspondingly, islandwide vacancy fell from 6.3% as of end-2021 to 5% as of the end of 2022. The 2022 net absorption amount is also 17.9% higher than the 10-year average annual net absorption of 0.97 mil sq ft between 2013 and 2022, adds CBRE.

David McKellar, CBRE’s co-head of office services, Singapore, notes the office market performance comes off the back of continued return-to-office momentum. “The full relaxation of measures since late April further motivated occupiers to take affirmative action to adjust their corporate real estate needs,” he explains.

However, CBRE notes that office market sentiment has started to “turn cautionary” towards the end of 2022. Demand has started slowing from larger occupiers, especially those in the tech sector. “With the recent mass layoffs and hiring freeze from the tech sector, some tech companies have already geared towards a smaller footprint in a bid to cut real estate cost,” remarks Tricia Song, head of research, Southeast Asia at CBRE.

Song anticipates shadow space to potentially increase from 0.2 million sq ft as of 3Q2022 to 0.7 million sq ft next year as some tech companies have offered their office space on an early surrender basis. Over the last two years, tech companies have generated about 40% - 50% of the total gross leasing demand in Singapore.

Song also points out that the pace of office rental growth has slowed. In 4Q2022, Core CBD Grade A office rents rose 0.9% q-o-q, easing from the 2.7% q-o-q growth registered the previous quarter. Hence, CBRE has trimmed its rental forecast for 2023. It currently projects Core CBD Grade-A office rents to grow 1% y-o-y next year, versus its previous forecast of 4% - 5% growth.

Vacancy rates could also potentially increase in 2023 on the back of weaker demand conditions. McKellar notes that landlords with vacant space or "immediate term availability" may need to consider more competitive terms, in order to compete with additional competition in 1H2023.

Meanwhile, given the softer market conditions, occupiers may reassess their office requirements. “In particular, the flight to quality will persist as companies have increased awareness of employees’ health and wellness post-pandemic,” CBRE states.

Despite the uncertainties in the near term, CBRE believes office rental growth prospects in the longer term remain positive as future supply is “relatively low”. In addition, Singapore’s position as a business and regional tech hub in Asia Pacific will continue to support the market.