Grade-A office rents to moderate as occupiers turn cautious

Median rents for office spaces in Singapore showed a sharp decline in 3Q2023, according to the latest data from the Urban Redevelopment Authority (URA). URA’s Office Property Rental Index recorded a considerable 4.9% quarter-on-quarter (q-o-q) jump for the third quarter, double the preceding quarter’s of 2.3%.

Head of Research and Consultancy at JLL Singapore, Tay Huey Ying, attributed this positive result to deals concluded in earlier quarters, when tenant demand was high due to the monumental expansion of the technology industry.

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However, said the URA’s Real Estate Statistics, Category 1 office space experienced a downward trend for the first time in five quarters, with median rents dropping 2.3% q-o-q. Category 2 office space, composed of all other areas outside of Category 1, saw median rents fall by 4.5% q-o-q, the first decrease in eight quarters.

JLL’s findings concluded that CBD Grade-A office rents also went down in 3Q2023, ending nine quarters of consecutive increases. Given the soft leasing market, tenants took the opportunity to bargain for better rental terms. To regain occupancy, especially with the majority of office space users being small- medium, landlords resorted to splitting large spaces, providing ready-fitted units, and modifying rental expectations.

Wong Xian Yang, Head of Research for Singapore and Southeast Asia at Cushman & Wakefield, remarked that the Downtown Core had the most net office demand in 3Q2023, with 398,264 sq ft, the highest since 1Q2020. On the other hand, the rest of the Central area saw negative net demand of -161,459 sq ft.

Financial and professional services continued to be the main drivers of office space demands, with 58% of new leases signed in the CBD from the first nine months of 2023. This was up from 26% from the entirety of 2022. Private wealth, asset management, and consumer goods sectors were also recorded as active in the third quarter.

Triggered by redevelopment projects and stock removals, occupancies went up from 89.2% to 90% in 3Q2023, as per CBRE research. Shadow space was also greatly reduced, halving to 0.33 million sq ft from the record high in 1Q2023 of 0.70 million sq ft. Flexible space operators such as WeWork saw an expansion of their presence in the CBD.

The incoming 1.9 million sq ft of Grade-A office space in the CBD in 2024 is said to negatively affect the rate of rents. Most of the stock will come from the IOI Central Boulevard Towers (1.3 million sq ft) and Keppel South Central (0.6 million sq ft) projects. With close to 1.1 million sq ft still uncommitted, landlords will have to lower their rental expectations to avoid vacancies.

Central Region office prices increased by a minimal 0.8% q-o-q in 3Q2023, following a 1% growth in the previous quarter. Despite the slight rise in prices, the 57 recorded office strata transactions in the Central Region was the lowest since 3Q2020, when there were merely 47 transactions.

CBRE Research expects a 1.5-2% rental growth for the Core CBD for the whole of 2023. This is a slower growth compared to the 8.3% rental growth experienced in 2022, and significantly lower than the GDP growth rate for the same year.

As of now, URA’s Office Property Rental Index has doubled the preceding quarter’s q-o-q growth. This indicates that tenant demand is on the rise, chiefly driven by financial and professional services and technology sectors. In spite of this, median rents in the Central Region have decreased, likely due to the emergence of new stock next year.

Projections for the Grade-A office rents in the CBD for the whole of 2023 stands at a 1.5-2% general increase, a significant decline from the 8.3% growth of the year before. Moving forward, landlords will be pushed to adjust their rental expectations to ensure their rentals stay competitive.