Limited new supply and rising rents brighten outlook

The office sector was the one bright spot in the real estate market in 2018. Average gross monthly rents for Grade-A office space in the CBD rose 10.8% in 2018, according to preliminary estimates by JLL Research — from $9.17 psf in 4Q2017 to $10.16 psf in 4Q2018. It surpassed the 7.6% rental growth in 2017. As a whole, Grade-A office rents in the CBD have recovered by 20.8% from the recent bottom of $8.41 psf in 1Q2017, says JLL.
“The outlook is positive,” says Chris Archibold, JLL head of leasing. “Grade-A office rents in the CBD have been rising at 2% to 3% a quarter over the last 12 months. It will continue to trend upwards because of the undersupply in the market over the next few years.”
Grade-A office rents in the CBD have been rising at 2% to 3% a quarter over the last 12 months (Photo Credit: Samuel Isaac Chua/EdgeProp Singapore)
The dearth of new Grade-A supply in the CBD in 2019, coupled with the withdrawal of Chevron House for refurbishment, will further tighten supply, putting increased upward pressure on rents, according to JLL Research. However, the availability of new supply outside the CBD should help relieve some pressure and cap CBD Grade-A rental growth.
Capital values for Grade-A office space in the CBD rose 12.2% y-o-y in 2018: from $2,463 psf in 4Q2017 to $2,763 psf in 4Q2018. This is faster than the 10.6% increase in 2017. CBD Grade-A office space has therefore seen capital values recover 25.2% from the recent bottom of $2,206 psf in 1Q2017. JLL Research says, “Demand-and-supply fundamentals are supportive of continued steady growth in capital values in 2019.”

Rapid expansion of co-working, flex-space operators

Demand for office space in the Downtown Core came up to 1.3 million sq ft in the first nine months of 2018 — surpassing the one million sq ft for all of 2017 (See Chart 1), according Mark Lampard, head of regional tenant representation, Southeast Asia, at Cushman & Wakefield (C&W).
Chart 1: Annual demand for office space (2010-2018YTD)
Source: Cushman & Wakefield Research