Office rents up by 3.3% q-o-q despite higher vacancy rates

By Valerie Kor / EdgeProp Singapore | April 26, 2021 12:15 PM SGT
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SINGAPORE (EDGEPROP) - Office vacancy rates in Singapore reached 11.9%, increasing 1.2 percentage points in 1Q2011. Net absorption of office space in Singapore was negative in 1Q2021, contracting by 204,514 sq ft in 1Q2021 after a slight improvement in 4Q2020 with a 21,528 sq ft gain.
CBRE Research notes that office supply remains tight, with a net supply of –96,876 sq ft in 1Q2021. The only office development that gained TOP this quarter was St James Power Station, which is fully leased to Dyson as its global headquarters.
This increase was mainly driven by the downtown core, which saw a decline of 312,200 sq ft in net absorption, notes Wong Xian Yang, head of research at Cushman & Wakefield.
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“As hybrid working persists, companies would continue to adjust office footprint. Financial institutions, the key demand-driving occupiers in the central area, are already scaling back their office spaces in the central region,” Wong adds. He cites the examples of Citigroup releasing three floors in Asia Square Tower 1, Mizuho cutting back 16% of its space in Asia Square Tower 2, and DBS giving up 75,000 sf in Singapore's Marina Bay Financial Centre (MBFC) Tower 3.
“We estimate that at least 500,000 sq ft of office spaces in the central area may be released by banks as secondary or shadow space over the next two years. Hence, downtown core vacancy rates can continue to edge higher, putting pressure on rents over short term,” says Wong.
There are still 1.5 million sq ft of new office supply due to be completed in the last nine months of 2021, says Leonard Tay, Head of Research, Knight Frank Singapore. Banks and financial institutions that are reducing their space needs may be replaced by technology giants and private wealth management firms who are expanding in the CBD. He foresees that office rents will bottom out during the later part of the year and recover in 2022.
The changes in vacancy rates are also uneven. Net absorption increased in the rest of the central area and the city-fringe area by 107,639 sq ft and 75,347 sq ft respectively, but these increases were offset by falling net absorption in the Downtown Core (–312,153 sq ft), Orchard (–32,292 sq ft) and Outside the Central Region (–43,056 sq ft), Tay notes. This could be because office occupiers secured space outside the Downtown Core at more affordable rents due to the rise of hybrid working, he says.
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CBRE Research believes that Singapore’s office demand is supported by gradual recovery of the economy, ease of doing business and stability of the country. However, it asserts that recovery will not be uniform, as the Grade A market is expected to be the main beneficiary as large corporates leverage on lower rents to move to higher quality and better located offices.

Higher rents

Despite higher vacancy rates, the URA's Office Rental Index for the Central Region increased 3.3% q-o-q, the largest since 1Q2011. It was also a reversal from the 3.5% decline q-o-q as recorded in 4Q2020.
Cushman & Wakefield’s Wong says that landlords may be holding firm on their rents in anticipation of people returning to the office. The increase could also have been driven by a “flight to quality”.
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“Albeit having lower space requirements going forward, firms are considering higher quality offices that will provide a better environment for their employees and incentivize employees to return to the office. As such, the premium for prime quality grade A offices over conventional grade A offices may widen as tenants take up better but smaller spaces,” he adds.
Tay Huey Ying, JLL Singapore head of research and consultancy, says that the surge in the office rental index could be led by offices with lower rents as URA’s statistics showed that the median rent of Category 2 leases that commenced in 1Q21 rose 2% from a quarter ago, while those for Category 1 offices were 3% lower in the same time period.
“The search for replacement premises by tenants displaced by the recent spate of redevelopment plans of ageing offices had likely strengthened demand and put upward pressure on the rents for Category 2 offices,” she adds.
The URA defines Category 1 offices as “those in buildings located in core business areas in Downtown Core and Orchard Planning areas that are relatively modern or recently refurbished, command relatively high rentals and have large floor plate size and gross floor area”. All other office spaces are classified as Category 2 offices. The median rent for Category 2 office leases that commenced in 1Q2021 stood at $5.17 psf/mth.
CBRE Research’s basket of rents indicates that average Grade A (Core CBD) office rents have stabilised this quarter at S$10.40 psf per month.
Office rents will bottom out in the second half of 2021, with further resumption of economic activities and rollout of vaccines to keep the pandemic at bay, says Cushman & Wakefield’s Wong.

Rental Indices of Private Sector Office Space (% change q-o-q)

Central Region
Central Area
Fringe Area
2020 Q1
0.3%
-0.8%
-1.3%
2020 Q2
-2.3%
0.0%
1.1%
2020 Q3
-3.0%
-4.5%
-5.1%
2020 Q4
-4.2%
-3.5%
-3.4%
2021 Q1
3.3%
3.3%
1.3%
Source: URA

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