Sources: Business Times
ANALYSTS foresee further rental growth in the central business district (CBD) office market, after rents in Singapore’s central region rose at a faster pace in Q1 2022 amid the flight to quality, back-to-office momentum, tight supply, and broad-based economic recovery.
Meanwhile, prices of office space in Singapore’s central region turned the corner in the latest quarter, reflecting robust interest from investors. Demand from buyers is also expected to grow for the rest of this year.
Leasing enquiries may increase further as workplace measures are further relaxed, said Tricia Song, head of research for South-east Asia at CBRE.
“While hybrid working could keep the overall office demand footprint below pre-pandemic levels, leasing demand is expected to continue, driven by a rapid expansion in demand from agile space, technology and non-bank financial sectors, and limited new supply,” she added.
Meanwhile, CBRE Research expects rental growth to gain momentum in the coming quarters, with core CBD rents predicted to climb 6.9 per cent year on year for the whole of 2022.
Lam Chern Woon, Edmund Tie’s head of research and consulting, is optimistic on the rental outlook for the office market amid growing demand and tight supply. The prime segment could outperform with rental growth of 3 to 5 per cent, he said.
Figures from the Urban Redevelopment Authority (URA) released on Friday (Apr 22) showed that the rental index for offices in the central region rose 1.6 per cent quarter on quarter this Q1, speeding up from the 0.9 per cent uptick in Q4 last year.
Wong Xian Yang, head of research for Singapore at Cushman & Wakefield, highlighted that the increase was led by fringe-area office rents, which grew 6.1 per cent, while those in the central area dipped 0.9 per cent.
“The fall in central-area office rents could be driven by older office stock that saw lower demand as hybrid work gained traction and the flight to quality continued,” he said.
Net demand for Downtown Core offices remained negative at -183,000 square feet (sq ft), marking the sixth straight quarter of negative net demand, he added. “Nonetheless, the level of negative net demand is considerably lower than the first half of 2021, when net demand had gone below -300,000 sq ft in each of the quarters then.”
Catherine He, head of research for Colliers in Singapore, said that as occupiers become more selective and focused on providing the right type of work environment – with a heightened emphasis on sustainability, wellness and talent attraction – high-quality office spaces with updated specifications, such as those in the CBD premium and Grade A segment, will likely be the main beneficiaries.
With higher CBD rents, she also expects the market recovery to spill over to city-fringe and Grade B offices.
URA data showed that median rents at Category 1 buildings – covering the better-quality properties in the city area and a proxy for prime CBD offices – moved up by 1.6 per cent to S$10.25 per square foot (psf) per month, quicker than the 0.6 per cent growth in Q4 2021. CBRE’s Song said this was supported by limited supply and led demand to spill over to other submarkets.
Further signs of a broad-based recovery were observed in the Category 2 segment, where median rents increased by 3.9 per cent to S$5.32 psf per month, outpacing the 0.4 per cent rise in the previous quarter.
“Office rents tracked by CBRE Research echoed the same sentiment. Grade A core CBD rents maintained a steady growth of 1.4 per cent from the preceding quarter to S$10.95 psf per month, while Grade B islandwide rents rose by 1.4 per cent in Q1 2022, as vacancies declined across the board,” Song added.
As at the end of March 2022, there was a total supply of about 834,000 square metres (sq m) in gross floor area of office space in the pipeline islandwide. That is about 6.1 per cent more than the 786,000 sq m of pipeline supply as at the end of 2021.
Colliers’ He pointed out that new CBD office supply remains tight, with Guoco Midtown set to be the only major completion there this year, while ageing office stock is expected to be taken off the market to be redeveloped under the URA rejuvenation schemes.
URA’s price index for office space in the central region climbed 4.4 per cent in Q1 this year, reversing from the 1.8 per cent drop in the previous quarter.
Leonard Tay, head of research at Knight Frank Singapore, described the turnaround in prices as “quite dramatic”.
He noted demand for strata office space from private wealth and family offices as well as small and medium-sized enterprises looking to right-size their space requirements in the technologically enhanced post-pandemic era.
“As such, demand for strata office units can be expected to grow in 2022 given the lack of new strata office supply in the medium term, some spillover investor interest from the private residential market as a result of the Dec 16 cooling measures, and the recent restriction on strata subdivision in certain corridors of the CBD,” Tay said.
Edmund Tie’s Lam said the steeper rise in office prices, as compared to rents, reflected continued strong investor interest, even amid the nascent stages of rental recovery.
“While a firmer rental growth is undoubtedly priced in, the weight of capital chasing quality office assets in our transparent and business-friendly environment has also led to the outpacing of capital values,” he added.
Islandwide, the vacancy rate remained at 12.8 per cent at the end of March this year, unchanged from December. This came as net demand, as measured by the change in occupied space, as well as the stock of office space both fell quarter on quarter.
The amount of occupied office space shrank by 13,000 sq m, a bigger decrease than the 10,000 sq m drop in Q4 last year.
Total islandwide office stock fell by 17,000 sq m in Q1 this year, compared with the decrease of 23,000 sq m in the previous quarter. Song said that the latest decline came mainly from the removal of stock in the Downtown Core (5,959 sq m), Rochor (3,656 sq m) and Yishun (3,738 sq m).
In her view, leasing activity in the CBD remains the focus of interest, while activity levels in the fringe and decentralised areas are picking up.
“Although non-banking financial sector and tech companies remain the main demand drivers, manufacturing and distribution sectors from pharmaceutical and FMCG (fast-moving consumer goods) companies also contributed to leasing activity in Q1 2022,” Song said.