CBD grade-A office rents down 0.2% year on year in 2Q2023

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The URA’s Central Region office rental index saw a slowing of q-o-q growth rate of 2.3% in 2Q2023, after two consecutive months that recorded 5.1% q-o-q growth in 4Q2022 and 1Q2023. The rate of growth has decreased, however, it’s the seventh consecutive year of increased growth from 3Q2021.

JLL’s research shows the average monthly gross rents for Grade-A offices within the CBD decreasing in 2Q2023, with just 0.2% q-o-q growth. Rental growth for the quarter has slowed down since 2H2022 when it slowed between 3.0% q-o-q in 3Q2022 to 1.2% in 4Q2022 and 1.1% in 1Q2023.

“It’s an indication that Singapore offices leasing industry is slowing off on the backdrop of the prolonged macroeconomic headwinds” claims Tay Huey Yang, JLL head of research and consulting. “The negative outlook for the economy and the constant downgrades from economists made occupiers wary and a majority of them choosing to renew their leases at lease expiry or the appropriate size to control expenses.”

In the past, difficulties in getting approval for capital expenditures has slowed expansion and relocation operations, Tay adds, particularly for firms with headquarters on the US and Europe, Middle East and Africa (EMEA).

Certain occupiers who decided to look at the long-term, they went on by negotiating deals to upgrade their premises to better facilities. Some significant lease deals in 2Q2023 include US Investment bank Morgan Stanley taking up 100,000 sq ft over five floors in the new IOI Central Boulevard Towers and French advertising company Publicis Groupe’s move to 55,000 sq ft of office space in Guoco Midtown office tower, which was granted a Temporary Occupation Permits in the 1Q2023.

“More occupiers are focusing on space optimization and some are even resizing to make their footprint more efficient,” says Tricia Song, CBRE head of research for Southeast Asia. This could have led to a greater psf monthly rent in the 2Q2023.

Leasing enquiries have declined from large occupiers
However, leasing inquiries particularly from large office tenants are “noticeably limited” since the beginning of 2023, according to JLL’s Tay. She anticipates that some of the ongoing negotiations on mid-to-large pre-leasing contracts for projects being constructed to conclude within the next few months. Leasing is mainly driven by occupiers who have “smallish needs” she says.

Demand for office space from the tech industry specifically has dropped down to around 20% of leases signed in 1H2023, a decrease from 46% in 2022, claims Wong Xian Yang, head of research for Singapore and Southeast Asia, Cushman & Wakefield (C&W).

The tech industry is the second-largest contributor to office demand. However, it has been replaced by the finance sector which was responsible for nearly 49% of CBD new leases in the 1H2023 period this year, an increase from 21% in the previous year.

“Financial and professional service firms have helped to offset a slowdown in demand for tech offices,” says C&W’s Wong. As Singapore’s wealth management sector grows professionals’ services such as legal or certification and education are entering a lot that are office spaces in the CBD.

“Correction mode” in 2H2023
The availability of office space is expected to increase over the next few months, due to the imminent conclusion of IOI Central Boulevard Towers yielding 1.26 million square feet of office space that is Grade A and growing shadow space, says JLL’s Tay.

CBRE’s Song note that the area of the shadow spaces inside offices within Downtown Core Downtown Core “remains quite high” however vacancy rates have been very low. But, “the shadow space may ultimately result in a higher the vacancy rate” Song warns. “Global macroeconomic headwinds as well as corporates cutting costs could worsen this situation during 2H2023.”

In the near-term the demand for office space is expected to outpace supply, says JLL’s Tay. She expects landlords of properties that have high vacancy rates being under pressure to reduce the asking rents in order in order to draw or keep tenants. “As this is the case, pressure upward on office rents needs to ease, and eventually give an opportunity for downward pressure to ease,” notes Tay.

Thus, JLL does not rule out the possibility of CBD Grade Office rents per month could be in an “correction phase” within 2H2023, which could drag down growth for the entire year to moderately negative zone.

The sale of the strata-titled freehold floor of offices at Solitaire located at Cecil at record-breaking price of $4,100 to $4.300 per square foot may be a factor in this 1.0% q-o-q uptick in the URA’s office property price index during 2Q2023 despite it being flat in the 1Q2023 JLL’s Tay notes.

“The rising demand for office buildings that are strata-titled has pushed up the capital value, especially due to the restrictions on the future strata subdivisions of commercial properties in a few precincts in the Central Region,” says Lam Chern Woon, Edmund Tie director of research and consulting.

Recent modifications in the Residential Property Act (RPA) could attract more attention to office buildings in the strata or commercial buildings usage that won’t require foreign buyers to get an approval for purchases on sites designated Residential or Commercial Lam adds Lam.

“With the high-net worth segment and the family offices becoming prominent market players deal-making could occur for assets with a value around $500 million or less,” adds JLL’s Tay. “This could boost confidence in the market for investment sales and support office costs.”

In the meantime, high interest rates in relation to the slashed office yields will keep institutional investors off the market and big-ticket en bloc office deals remaining tepid According to Tay.