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Worst seems to be over for CBD Grade A office rental market

29 Sep, 2017

Firmer signs of a turnaround in prime office rents and prices have emerged from the latest data from property consultancies, as Grade A office rents and prices in Singapore's Central Business District (CBD) not only improved for the second straight quarter but also rose at a faster clip.

This has led analysts to opine that the worst appears to be over for this market.

Two straight quarters of rent and capital value growth, with the second coming in at a stronger pace than the first, is a reaffirmation that the CBD Grade A office market is now firmly on a recovery path, one of them said.

Based on preliminary estimates, average monthly gross rent of Grade A offices in the CBD rose 4.3 per cent from a quarter ago to S$8.86 per square foot (psf) in the third quarter led by the Marina Bay sub-market, following a modest 0.7 per cent uptick in the second quarter that ended eight straight quarters of rental decline.

Leasing momentum was sustained in the third quarter as companies that were caught off-guard by the speed of the office market recovery scrambled to commit in anticipation of further rental increases in 2018.

The major leasing transactions in the third quarter included Ocean Network Express taking up 50,000 sq ft of space at Marina One and giant coworking space operator WeWork occupying 28,000 sq ft of space at Beach Centre.

Investment interest in the office sector has also driven up CBD Grade A office prices. Capital values rose a steeper 5.1 per cent in the third quarter from a quarter ago to S$2,376 psf, compared to the 2.3 per cent quarter-on-quarter increase in the second quarter.

Such recovery in office rents and prices has come on the back of improving economic fundamentals and labour market. Government data released on Tuesday showed surging global demand for electronics once again lifting factory output in August. Manufacturing output jumped 19.1 per cent year-on-year in August, beating economists' expectations of a 16 per cent increase and following from a 21 per cent surge in July.

Business sentiment in many industry sectors is generally more positive now than a year ago, and this has increased occupier activity. The rapid ramp-up of co-working demand has also had a very positive impact on sentiment.

Consultants project that CBD Grade A office rents and prices will continue trending up in the quarters ahead as the brighter economic outlook should continue to lift business confidence and support relocation of office occupiers.

CBD Grade A office rents could post full-year growth of between 6 per cent and 8 per cent, given that the year-to-date increase stands at 3.7 per cent. Capital values are expected to outperform rents, and could chalk up growth in excess of 10 per cent for the whole of 2017.

But many of the large occupiers with lease expiries before 2019 have already locked in their accommodation. In order to fill developments with significant vacancy, investors will either need to commit a larger number of smaller tenants, or look to attract occupiers with lease commencement dates more than 18 months away.

A two-tiered office market has emerged with new projects enjoying higher occupancy and rental recovery, while older and less efficient office buildings may struggle to fill the space vacated by tenants relocating to newer developments. But the market will experience stronger rental growth in subsequent years on the back of better economic prospects and a significant reduction in supply pipeline post-2017.

Adapted from: The Business Times, 27 September 2017