Grade-A office rents to moderate as occupiers turn cautious

By Nur Hikmah Md Ali
/ EdgeProp Singapore |
The bulk of the net demand in 3Q2023 was driven by the Downtown Core, where net office demand reached 398,264 sq ft (Photo:: Samuel Isaac Chua/EdgeProp Singapore)
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URA headline office property rental index recorded a sharp 4.9% q-o-q jump in 3Q2023, double the 2.3% q-o-q growth in the preceding quarter. "We believe this is largely attributable to leasing deals concluded several quarters back when occupier demand was robust, underpinned by the explosive growth of the technology sector," says Tay Huey Ying, JLL head of research and consultancy, Singapore.
Based on leases contracted in 3Q2023, however, URA's real estate statistics showed that median rents fell for the first time in five quarters for Category 1 office space, which URA defines as buildings in the Core Business District, including the Downtown Core and Orchard Planning Area, which are relatively modern, recently refurbished and have large floor plates and gross floor area, as well as command relatively high rents. They were down 2.3% q-o-q.
Median rents in 3Q2023 fell for the first time in eight quarters for Category 2 office space (which URA defines as all other office areas outside of Category 1), down 4.5% q-o-q.
It aligns with JLL's findings that CBD Grade-A office rents declined in 3Q2023, ending nine quarters of consecutive growth. Specifically, the average gross effective rents for the basket of CBD Grade-A office space tracked by JLL fell 0.3% q-o-q to $11.29 psf per month (pm) in 3Q2023, from $11.32 psf pm in 2Q2023.
"The 3Q2023 rent correction came as tenants took advantage of the soft leasing market to negotiate for more favourable rental terms," says Tay. "To bolster occupancy in a market currently dominated by small-to-medium space users, landlords are taking proactive steps such as sub-dividing larger spaces into leasable units, providing ready-fitted units, and adjusting their rental expectations to meet the market."
The bulk of the net demand in 3Q2023 was driven by the Downtown Core, where net office demand reached 398,264 sq ft, according to Wong Xian Yang, Cushman & Wakefield head of research for Singapore and Southeast Asia. It was the strongest q-o-q growth in net demand since 1Q2020, he adds.
On the other hand, net demand in the rest of Central area, which includes areas such as Outram, River Valley, Rochor, Newton, Orchard and Rochor area, saw net demand of -161,459 sq ft, notes Wong. "The difference in net demand could be reflective of flight to quality, with a strong concentration of Grade-A offices located within the Downtown Core."

Financial and professional services – main demand drivers

According to Wong, financial and professional services remained the dominant demand drivers of office space in the CBD, making up 58% of new leases in the CBD in the first nine months of 2023, up from 26% for the whole of 2022.
"Amid uncertainties in the global economy and rising geopolitical tensions, Singapore remains an attractive destination as a regional wealth hub," says Wong. "This has encouraged expansion demand from asset management, financial services and legal sectors. While overall demand from tech has slowed, we still note pockets of demand from tech companies looking to grow their footprint in Singapore."
More diversified demand drivers have made up for the slack resulting from the slowdown in the tech sectors, adds Tricia Song, CBRE head of research for Singapore and Southeast Asia. Private wealth, asset management and consumer goods were some of the more active sectors in 3Q2023.
Tighter market conditions arising from project redevelopments, and hence stock removals, have also helped to prop up occupancies from 89.2% in 2Q2023 to 90% in 3Q2023, says Song. According to URA data, about 0.45 million sq ft was removed from stock in 3Q2023, which could have been attributed to the redevelopment of Faber House, Central Square and Central Mall.
"Despite concerns surrounding WeWork, other flex space operators appeared undeterred and continued to expand their presence within the CBD," observes Song. Shadow space had halved in 3Q2023 to 0.33 million sq ft, from the record high of 0.70 million sq ft in 1Q2023.
However, rental growth in the Central area is expected to moderate in subsequent quarters amid an expected higher-for-longer interest rate regime and global economic uncertainties, says Cushman & Wakefield's Wong.

CBD to see 1.9 million sq ft new Grade-A office space

According to JLL, islandwide office completion is set to hit a seven-year high in 2024. Close to 1.9 million sq ft of Grade-A office space is scheduled for completion in the CBD alone, predominantly from two projects: the IOI Central Boulevard Towers (1.3 million sq ft) and Keppel South Central (0.6 million sq ft).
As of 3Q2023, JLL estimates that close to 1.1 million sq ft remained uncommitted. "The sheer amount of office space entering the market next year is expected to put downward pressure on rents in the coming quarters," says JLL’s Tay.
In addition to new supply, Cushman & Wakefield's Wong expects "the emergence of substantial secondary stock" in the Central Region next year. Hence, he expects occupiers to remain cautious: with constraints to capital expenditure, he reckons there will be higher lease renewal activity rather than relocation.
Central Region office prices rose by 0.8% q-o-q in 3Q2023, following the 1% rise in the preceding quarter, says Wong. While prices have increased slightly, overall transaction volume remained subdued owing to high interest rates. In 3Q2023, there were only 57 office strata transactions within the Central Region, the lowest since 3Q2020, when there were only 47 transactions.
CBRE Research forecasts Grade-A office rents in the Core CBD to grow by 1.5% to 2% for the whole year, outpacing projected GDP growth, although slower than the 8.3% rental growth in 2022.

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