Office sector: Still a tenant’s market

By Douglas Dunkerley / Corporate Locations | June 8, 2016 10:00 AM SGT
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The Singapore office market has continued to soften over the last six months, with demand remaining fragile. Ironically, it is the larger deals that are coming to the fore. As expected, the new schemes coming online are attracting the most interest from the larger space users.
The Bank of Tokyo-Mitsubishi UFJ is in advanced negotiations to relocate from Republic Plaza to Marina One and will be taking up 140,000 sq ft. Also lined up to go to Marina One is Daiwa Capital Markets from OUE Downtown 2.
Guoco Tower is one of the busiest new developments at the moment because it is expected to get its Temporary Occupation Permit in early July. New tenants here include Japanese transportation group “K” Line (20,000 sq ft), food company Bunge Agribusiness, AccorHotels Group (21,000 sq ft) and HR consulting firm Manpower. AXA Group is also rumoured to be leasing at least 30,000 sq ft. The Guoco Group itself will be occupying two whole floors.
With more major relocations in the pipeline, substantial space is expected to become available in buildings such as
Republic Plaza, Raffles City Tower and 20 Collyer Quay
Cost savings the main driver
Elsewhere, most of the demand is being driven by companies looking to save costs either by moving to more practical space, or a cheaper building. Companies moving in this year and next probably had their last rent review in 2013 or 2014, when rental rates were still advancing. Thus, many firms can move to a more efficient, brand-new building without having to pay more, which encourages a flight to quality.
Industries that continue to be active in the office market include software/IT, shipping, pharmaceuticals, insurance and finance. In the software sector, IBM secured a lease on 67,000 sq ft in Marina Bay Financial Centre (MBFC) Tower 2 earlier in the year (previously occupied by BHP Billiton). BlackBerry has also moved back into town and taken up a floor at Goldbell Towers. Salesforce has expanded significantly in Suntec City Tower 5. Banking software provider Silverlake Axis has leased a whole floor at 6 Raffles Quay, while financial software developer Numerix Singapore has leased half a floor at 1 Finlayson Green. Trading Technologies is moving from Samsung Hub to Asia Square, and JDA Software is also moving to Asia Square from Suntec City.
In the finance sector, Union Bancaire Privée has moved from OUE Bayfront to One Raffles Quay (South Tower). Bank Pictet & Cie is expanding within MBFC Tower 2, absorbing some of the space given up by Barclays Bank. Financial trading company Propex has secured half a floor in SGX Centre and Jump Trading has expanded within Asia Square. Corporate services firm Intertrust has leased a whole floor in Robinson 77. Edelweiss Alternative Asset Advisors has moved into One Raffles Place Tower 1 from Royal Group Building. Bloomberg is expanding in Capital Square, which ultimately led to Nikon Singapore relocating to lease 15,000 sq ft in Mapletree Anson, which is now full.
Logistics/shipping companies remain active for a variety of reasons. Yang Ming Shipping has leased a whole floor in CES Centre and will be relocating from CPF Building. CP World is relocating to SPRING Singapore Building from Anson House and Team Tankers is relocating from Millenia Tower to Suntec City. Iino Shipping has moved from HarbourFront Centre into Capital Tower. Logistics firm Panalpina is moving from Manulife Centre to Suntec Tower 4.
Elsewhere, New Balance moved from Valley Point to Great World City, advertising firm Hakuhodo Singapore relocated from TripleOne Somerset to UE Square, and City Gas has leased offices in PSA Building. Outside the CBD, the largest deal that took place recently involved Johnson & Johnson leasing 100,000 sq ft of office space in Ascendas’ latest scheme, Ascent in Singapore Science Park.
New schemes ‘poaching tenants’
The market will be dominated, and significantly affected, by major schemes due for completion in the next eight months. With more major relocations in the pipeline, sub stantial space is expected to become available in buildings such as Republic Plaza, Raffles City Tower and 20 Collyer Quay. Some large tenants are possibly relocating from Triple- One Somerset.
This is just the tip of the iceberg, in terms of second- hand space that will become available. Relocation to save costs or upgrade rather than for expansion will be the pattern over the next few years for most companies.
The new schemes will not necessarily be filled up by new requirements to the market. It will more likely be a case of poaching tenants from existing buildings. It is expected that larger swathes of older space will become available in time to come, which will further increase tenants’ choice of opportunities in 2017.
This older space is not to be confused with “shadow space”, which is not marketed by the landlord, but by tenants who have surplus space to offload. However, bit by bit, these spaces are either being absorbed or the leases are falling in, so they are no longer categorised as shadow space.
Rental forecast
Even the most resilient landlords have started to adjust their rates downwards, with some making greater corrections than others. Much depends on the vacancy rate of a particular building, the flexibility of the landlord and the prospect of current tenants being drawn to the new schemes.
The middle/high-end sector of the market will see the most competition, with the economy range remaining fairly stable; for instance, with due respect, a tenant in International Plaza is unlikely to be a target for Marina One.
Effective monthly rents for top prime office space still average between $9.50 and $11 psf. The midrange buildings/locations command monthly rental rates of between $7 and $8 psf while in the economy range, it is in the region of $5.50 to $6 psf.
Some of the more proactive landlords are promoting a flexible approach, and offering more inventive rental packages. Phased rates over the lease term are becoming more common but not widespread and are only offered to bigger tenants by the larger landlords with lots of space to fill. The phased rate always goes one way — upwards.
Landlords are aware that the expense of fitting out a new unit can sometimes prove prohibitive and negate any cost savings that might come from relocating. Therefore, in certain cases, the larger landlords have offered capital contributions to help offset a tenant’s fitting-out costs.
Again, this is usually offered only to the larger space users and it is important for tenants to understand that any lump-sum payment made to them to help cover such costs will be amortised over the term of the lease. So, it is in effect a loan that is paid back on a monthly basis. All the same, this can be really useful to the tenant to cushion the burden of capital expenditure and allow it to write off the cost of fitting out over a shorter period.
To conclude, demand is expected to remain weak, with rental rates likely to soften a further 10% over the next 15 months. Supply will increase across the board, while the number of fitted units that will become available will grow. Incentives for tenants are likely to be improved. It is indeed a tenant’s market.
This article appeared in the City & Country, Issue 731 (June 6, 2016) of The Edge Singapore.

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