Grade-A office rents to moderate as occupiers turn cautious
The URA Office Property Rental Index recorded a sharp 4.9% quarter-on-quarter jump in 3Q2023, more than double the rate of growth in the preceding quarter. According to JLL Head of Research and Consultancy, Singapore, Tay Huey Ying, it is largely attributable to the conclusion of leasing agreements when the demand for office space was strong, thanks to the booming technology sector.
However, looking at the leases contracted in 3Q2023, URA’s real estate statistics indicate that for Category 1 office space, located in the Core Business District including the Downtown Core and Orchard Planning Area, median rents fell for the first time in five quarters, declining by 2.3% quarter-on-quarter. Similarly, Category 2 office space, which comprises all other areas outside of Category 1, reported the first dip in eight quarters, down by 4.5%.
JLL’s findings are in line with this recorded decrease as the average gross effective rents for CBD Grade-A office space tracked by JLL fell 0.3% quarter-on-quarter to $11.29 psf per month (pm). Tay believes this is due to tenants taking advantage of a relatively soft leasing market to secure more favourable terms.
To stimulate greater occupancy, landlords are devising strategies such as sub-dividing large spaces, offering ready-fitted units, and adjusting rental expectations. According to Wong Xian Yang, Cushman & Wakefield Head of Research for Singapore and Southeast Asia, the bulk of demand for office space was seen in the Downtown Core with 398,264 sq ft in net office demand, the biggest quarter-on-quarter growth since 1Q2020. Meanwhile, the rest of the Central Area saw -161,459 sq ft in net demand.
Financial and professional services were major drivers of office space demand in the CBD, comprising 58% of new leases in the first nine months of 2023. This is a testament to Singapore’s appeal as a regional wealth hub, attracting expansion from asset management, financial services, and legal sectors. It also indicates that growth from other industries such as private wealth, asset management, and consumer goods have helped to make up for the relative sluggishness observed in the tech sector.
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Overall, the market conditions are improving with occupancies rising from 89.2% in 2Q2023 to 90% in 3Q2023. This is attributed to the tighter market arising from project redevelopments, with approximately 0.45 million sq ft removed from stock.
In 2024, completion of Grade-A office space in the CBD is expected to touch a seven-year high, with close to 1.9 million sq ft to be available, largely from the IOI Central Boulevard Towers (1.3 million sq ft) and Keppel South Central (0.6 million sq ft). As of 3Q2023, JLL estimates that close to 1.1 million sq ft of this space remained uncommitted.
Central Region office prices rose by 0.8% quarter-on-quarter in 3Q2023 following a 1% increase in the preceding quarter. However, overall transaction volume stayed subdued due to higher interest rates with only 57 office strata transactions occurring in the Central Region, its lowest since 3Q2020.
CBRE Research forecasts Grade-A office rents in the Core CBD to grow by 1.5% to 2% for the entire of 2024, albeit slower than the 8.3% growth rate observed in 2022.
With global economic uncertainties and a high-for-longer interest rate regime, rental growth in the Central Region is likely to slow down. In addition, the sizeable secondary stock expected to emerge could further dampen occupier demand. Hence, tenants are likely to remain cautious, opting to renew their leases instead of relocating.