Office rents grow for sixth consecutive quarter, up 5.1% in 1Q2023

/ EdgeProp Singapore |
The islandwide office vacancy rate inched downwards by 0.1 percentage points to 11.2% in 1Q2023.(Picture: Albert Chua/The Edge Singapore)
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SINGAPORE (EDGEPROP) - Singapore office rents in the Central Region grew 5.1% q-o-q in 1Q2023, maintaining the same pace of growth registered the previous quarter, according to URA data released on April 28.
This is the sixth consecutive quarter of growth in office rents. The continued rise comes off the back of healthy leasing activity for office spaces since last year, observes Tay Huey Ying, head of research and consultancy, Singapore at JLL. “We believe the robust growth is largely a reflection of the buoyant office leasing market in 2022 since leases are typically signed or renewed several months ahead of commencements,” she says.
rental index graph - EDGEPROP SINGAPORE
Source: URA
Tay adds that office rents may have also received a boost from a higher volume of smaller deals which typically command higher psf rates. “JLL observed that leasing activity in 1Q23 was largely led by the small and medium-sized space occupiers with immediate needs to accommodate new workplace design or increased headcounts that took place in 2022.”
The growth in Central Region office rents was driven by growth across both the Central Area and the fringe area. However, Tricia Song, head of research, Southeast Asia at CBRE, highlights that the pace of rental growth moderated in the Central Area, which registered a 3.9% q-o-q increase compared to a 6.6% q-o-q growth in 4Q2022.
In particular, Song notes that the rate of rental increase continued to slow for prime buildings in the Downtown Core and Orchard planning areas, based on median contracts signed. URA data shows that median rentals by contract date for Category 1 office space – a proxy for prime CBD offices – grew by 0.2% q-o-q to $10.77 psf per month in 1Q2023, moderating from the growth of 0.8% q-o-q in the previous quarter. Vacancy rates for Category 1 buildings increased from 9.5% in 4Q2022 to 10.9% in 1Q2023.
Source: URA, CBRE
The slower performance for Category 1 offices could be due to weaker sentiment arising from recent tech layoffs and the resulting increase in shadow space, notes Song. “CBRE Research notes that the amount of shadow space has risen significantly towards the end of 2022 when tech firms embarked on large-scale job cuts, resulting in a more muted market sentiment across the office sector.”
Meanwhile, prices of office space in the fringe area posted an increase of 8.8% q-o-q, reversing from the 4% q-o-q decrease registered in 4Q2022. The stronger performance comes in tandem with tighter vacancy rates in the fringe area and Outside Central Region. In 1Q2023, vacancy rates in the fringe area reduced to 7.8% from 8.4% the previous quarter, while vacancies in the Outside Central Region lowered to 15.8% from 16.6% previously.
“Given an uncertain economic outlook alongside tightened financing conditions, some cost-conscious tenants are looking at lower cost options outside the CBD. This could have driven office rents in the fringe area higher,” remarks Wong Xian Yang, head of research for Singapore and Southeast Asia at Cushman & Wakefield.
In any case, overall demand for office spaces in 1Q2023 remained relatively healthy, with islandwide net demand reaching 226,000 sq ft. Wong notes that the Downtown Core predominantly drove demand. “The Downtown Core saw positive net demand of about 291,000 sq ft due to the completion of Guoco Midtown which reportedly achieved a strong pre-commitment rate of 80%,” he says.
As a result, Islandwide vacancy rates inched downwards by 0.1 percentage points to 11.2% in 1Q2023. “This continues to be the lowest vacancy since 3Q2021’s 12.9%,” says CBRE’s Song.
stock and vacancy graph - EDGEPROP SINGAPORE
Source: URA
In terms of office prices, URA data shows prices of office space in the Central Region remained the same in 1Q2023, compared to a 3.7% q-o-q increase recorded in the previous quarter. Prices of office spaces in the Central Area saw a decrease of 0.4% q-o-q, while those in the fringe area witnessed an increase of 2.3% q-o-q, notes Lam Chern Woon, head of research and consulting at Edmund Tie.

Ease in office rental growth in coming months

Following the robust growth in rents in 1Q2023, Cushman & Wakefield’s Wong predicts office rental growth will taper off in the coming months, amid cautious business sentiments and lingering concerns surrounding the global banking sector. “That said, a sharp correction in office rents is unexpected as overall supply in the mid-term looks tight,” he adds.
In addition, demand for new office towers remains persistent. Despite a temporary pullback in tech demand, Wong maintains office demand could come from non-bank financial and professional services sectors, as well as Chinese companies.
JLL’s Tay believes leasing activity for recently or soon-to-be completed projects such as Guoco Midtown and IOI Central Boulevard Towers will maintain good traction as occupiers take the opportunity to lock in good quality office spaces. However, backfilling of spaces vacated by relocating occupiers could take longer given the subdued sentiment. “This will likely keep signing rent growth modest, if at all, for the rest of 2023,” she says.
On the sales front, Tay believes office asset prices will be supported by strengthening demand for investment grade strata-titled offices. Strata office transactions have dominated the office investment sales market (deal size of at least $5 million) in the last six months, accounting for over 53% of the sales by value, up from an average of 15% over the past five years, she notes. Recent deals include the sale of three office floors at Solitaire On Cecil, including level 20 which sold at $4,325 psf, a record unit price for a full floor in a strata-titled office building in Singapore.
“We foresee more funds could be channelled into this asset class following the fresh round of residential market cooling measures targeted at curbing investment and foreign purchases of residential properties that were announced on April 26,” Tay opines.
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