Grade-A office rents to moderate as occupiers turn cautious

The Singapore Urban Redevelopment Authority (URA) office property rental index recorded a sharp 4.9% year-on-year (y-o-y) jump in the third quarter (3Q) of 2023, more than double the 2.3% growth in the preceding quarter.

Tay Huey Ying, JLL head of research and consultancy, Singapore, believes that this is largely attributable to leases contracted in the past few quarters, when demand had been robust due to the booming technology sector.

However, based on URA’s real estate statistics, median rents for Category 1 – buildings in the Core Business District, including the Downtown Core and Orchard Planning Area, that are relatively modern, recently refurbished and of typically large floor plates and gross floor area – dropped for the first time in five quarters, by 2.3% q-o-q.

For Category 2 office space (all office areas outside of Category 1), an 8-quarter growth streak was brought to an end as median rents fell 4.5%.

JLL found that the average gross effective rents for the basket of CBD Grade-A office space tracked by the firm declined 0.3% q-o-q to $11.29 psf per month (pm) in 3Q2023, from $11.32 psf pm in 2Q2023.

Tay suggests that tenants had taken advantage of the softened rental market to secure favourable terms. Landlords have likewise responded by subdividing larger spaces, providing ready-fitted units, and adjusting their rental expectations.

In the CBD, net office demand reached 398,264 sq ft in 3Q2023, according to Wong Xian Yang, Cushman & Wakefield head of research for Singapore and Southeast Asia, the strongest q-o-q growth since 1Q2020.

In comparison, net demand in the rest of Central area, which includes areas such as Outram, River Valley, Rochor, Newton, Orchard and Rochor area, saw net demand of -161,459 sq ft. Wong surmises that this could reflect a flight to quality, given the concentration of Grade-A offices within the Downtown Core.

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Financial and professional services continued to be the strongest demand drivers for office space in the CBD, making up 58% of new leases in the first nine months of 2023, up from 26% for the whole of 2022.

Private wealth, asset management and consumer goods were some of the more active sectors in 3Q2023, according to Tricia Song, CBRE head of research for Singapore and Southeast Asia. Shadow space saw a halving in the quarter to 0.33 million sq ft, compared to the record high of 0.70 million sq ft in 1Q2023, while flex space operators have continued to expand their presence in the CBD.

Tighter market conditions arising from project redevelopments have also helped to prop up occupancy rate from 89.2% in 2Q2023 to 90% in 3Q2023, says CBRE’s Song.

In the near term, JLL expects island-wide office completion to hit a seven-year high in 2024, with close to 1.9 million sq ft of Grade-A office space due for completion in the CBD alone from the IOI Central Boulevard Towers (1.3 million sq ft) and Keppel South Central (0.6 million sq ft). As of 3Q2023, 1.1 million sq ft remained uncommitted.

Tay suggests that such high volumes entering the market will inevitably put pressure on rents in the coming quarters. Meanwhile, Cushman & Wakefield’s Wong anticipates “the emergence of substantial secondary stock” in the Central Region next year. He forecasts that occupiers will likely adopt a more cautious stance with capital expenditure constraints, and opt for lease renewals over relocation.

Central Region office prices rose slightly by 0.8% q-o-q in 3Q2023, after a 1% increase in the preceding quarter. However, overall transaction volume remained subdued, with 57 office strata transactions in the Central Region, the lowest since 3Q2020.

CBR Research expects Grade-A office rents in the Core CBD to increase by 1.5% to 2% for the whole year, although slower than the 8.3% rental growth experienced in 2022.

The Singapore office rental market thus remains a dynamic one, as landlords continue to implement measures to boost occupancy amidst higher-than-usual demand drivers, while also being faced with new supply. How they respond to this challenge will determine the direction of the market in the next few quarters.