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As office rents started to fall in the second quarter, and with headwinds expected to linger, is it all downhill from here, or will the leasing market recover?
By Nikki De Guzman
The rise
Singapore’s office market has been posting increases in rents since early 2013, where it saw a 3.9 percent increase from that recorded in 2012. Fast forward to 2014, and the sector saw even more stellar performance after posting a 14.3 percent increase in rents, backed by robust leasing activities.
Given this, many have expected the office market to continue to shine this year, with property experts foreseeing continued rental growth on the back of steady occupier demand.
This was true in the first quarter of the year. Average gross monthly rents for Grade A office spaces in most micro-markets across the central business district (CBD) held firm. Others, such as the Raffles City / New Downtown micro-market, even posted increases, rising 1.6 percent and 1.0 percent respectively, Colliers’s Q1 report revealed.
The fall
However, recent numbers suggest that office rents in the city-state’s CBD likely peaked in the first three months of this year. The office market is beginning to react to current market conditions, with rental growth for office spaces moderating in Q2.
The Urban Redevelopment Authority’s (URA) rental index, retrieved through the Real Estate Information System (REALIS), demonstrates this decline clearly. Office rents in the Central Region weakened by 2.6 percent in the second quarter to 192.9, after rising 0.6 percent to 198 in the first quarter (refer to Figure 1). The decline marked the first downward movement in office rents in the city-state in over two years.
A Cushman & Wakefield report also revealed that in Q2 of this year, overall rent for Grade A office space fell $9.77 psf per month, a 6.3 percent decline from the preceding quarter, which saw an overall quarter-on-quarter increase of 1.3 percent.
Meanwhile, Knight Frank reported that Grade A office spaces in the Raffles Place / Marina Bay submarket registered a 1.5 percent quarter-on-quarter decline to $13 per sq ft in Q2.
Further softening has become more pronounced, as many financial institutions consolidated offices and more tenants went for cheaper alternatives, such as decentralised office spaces. According to Knight Frank’s Q2 report on office spaces in Asia Pacific, Singapore is facing “a double whammy of strong supply and lower take-up on the back of a slowing economy”.
Alice Tan, Director and Head of Research at Knight Frank Singapore said: “Large-space occupiers, especially the financial institutions, are consolidating their offices in the CBD, which would
partly contribute to higher vacancy in the upcoming two to three quarters. The weakening demand both from established firms and small-medium enterprises is expected to weigh on office rents
towards the end of 2015.”
Industry experts also said the steady new supply seen last year, with the completion of South Beach and CapitaGreen in Q4 2014, injected a sizable nett floor area in the CBD office market; and is weighing down office rents.
Analysts also noted that there is an estimated eight million sq ft of vacant office space in the market, adding downward pressure on a leasing segment already challenged by declining demand.
For instance, CapitaGreen—which offers 703,000 sq ft of net lettable area (NLA)— is currently 83 percent occupied. This is below the occupancy average for top-grade office buildings in the CBD,
which stands at about 95 percent. The 40-storey office building, which officially opened earlier this month, is home to over 30 multinational companies, including Bordier & Cie, Cargill, and Schroders.
In an interview with the local media, CapitaGreen’s owner CapitaLand said that while the occupancy rate is currently below average, its prospects remain bullish, and it is still optimistic about the office market.
However, some analysts do not share the same sentiment.
According to Alan Cheong, Senior Director of Research and Consultancy at Savills Singapore, the leasing market will continue to “soldier on under a cloud of issues, including weak economic
performance, a cautious hiring market, an evolution of spatial needs by different office tenants and the onset of a quantum leap in supply.
“Depending on the grade of the office building, we are forecasting CBD Grade A office rents to shed by another two to 10 percent for the second half of 2015 over the first half,” he added.
Knight Frank shared the same outlook, saying that “in light of slowing demand (and) the muted outlook for Singapore’s economic growth, (we) expect office rents to decline further by five percent to seven percent year-on-year by Q4 2015.”
Specifically, Knight Frank said prime office spaces in Raffles Place and Marina Bay are likely to experience the most noticeable rental moderation, with a four to five percent decline year-on-year by Q4. Tan added that by the end of the year, “prime office spaces in Tanjong Pagar would also see lower rents, of around two to three percent downward adjustment, (while those in the) CBD-fringe areas such as City Hall and Suntec / Marina Centre could see lower declines of around one to two percent.”
The future
As market analysts expect the local office market to continue to face headwinds including a large tranche of upcoming prime office space by 2016 (refer to Figure 2), further declines in rents are projected.
A report by Deutsche Bank highlighted that soft demand from the financial sector will compound the influx of supply, as these companies continue to restructure and consolidate non-profitable businesses.
It also highlighted a noticeable increase in the number of occupiers—like those from the tech industry—that are being drawn to the more affordable campus-like environment found in business park spaces in suburban areas.
“As such, the vacancy rate is expected to go up in the next two years, given the wave of new
completions expected in 2016,” said Deutsche Bank.
Knight Frank also expects further moderation in office rents next year. Tan said, “Assuming the global economic growth shows weakness and Singapore’s business sentiment turns out to be tepid next year, office rents could slip by another four percent to five percent year-on-year by Q4 2016.”
Given this, analysts expect wariness among landlords due to the potential competition for the limited pool of tenants to fill up the vacant spaces.
Knight Frank said: “With this existing competitive leasing market, (landlords) are more likely to consider retaining current tenants by offering favourable lease renewal terms to lock in these tenants for another lease term.”
On the other hand, Savills said that, given the large amount of supply coming on stream starting next year, the next 18 months will be a tenant’s market. “The slate of new supply, on top of the secondary market space—from those left vacant by tenants who either moved out or shrunk their real estate footprint—gives tenants a buffet of choices,” said Cheong.
This sentiment was echoed by DTZ’s executive director of Business Space, Cheng Siow Ying, who noted that “firms will have more premium and Grade A office options in the CBD and fringe locations”.
“Some firms may take this opportunity to relook and strategize consolidation or expansion plans, while others may employ a wait-and-see approach through the supply wave of 2016.”
Servcorp Serviced Office
Level 24 CapitaGreen, 138 Market Street
Type: Serviced Office
Operator: Servcorp
Lease Terms: Minimum of one month to one year
Nearest MRT: Raffles Place, Tanjong Pagar, Downtown and Telok Ayer
Nearby Key Amenities: Lau Pat Sat Festival Market and China Square Food Centre
Set in this newly completed 40-storey prime office development in the city centre is Servcorp’s latest serviced office.
Offering 78 fully furnished premium office suites, and business lounges with nine workstations, Servcorp’s serviced office provides excellent conditions for setting up a local branch office or representative office.
It also features fully equipped meeting rooms, a corporate boardroom and a kitchen / pantry.
Office spaces are available on flexible lease terms of one month to one year. The serviced office also provides a virtual office function, professional administrative support, as well as a dedicated receptionist to manage tenants’ calls.
It is also equipped with superfast tier-1 broadband internet connection, Cisco IP phones and an online portal for convenient office management, including real-time calls.
Located in Singapore’s central business district, Servcorp Serviced Office at CapitaGreen is just a few minutes’ walk from Raffles Place, Tanjong Pagar, and the Downtown and Telok Ayer MRT stations. There are also multiple bus stops within walking distance.
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