Growth of grade A office rents stalls as tenants delay expansion plans

Rents hit the wall after eight consecutive quarters’ growth.

Although the availability of vacant CBD Grade A office space reached an almost three-year low in July-September 2019, softer demand conditions halted rental increases, according to Savills Singapore. The average monthly rent for Savills basket’s CBD Grade A offices stayed flat in Q3 2019 at $10.08 psf, after eight consecutive quarters’ growth.

“In the coming four quarters, the market is expected to see a substantial amount of remaining space in new projects and possible secondary stock being vacated. Landlords are lowering their rental expectations to adapt to the situation,” Savills Singapore CEO Marcus Loo said in a report.

The net demand of CBD Grade A office buildings tracked by Savills amounted to about 338,000 sqft for the third quarter. As it was in the previous quarter, the majority of the take-up in Q3 was from tenants relocating to newer projects, such as Marina One, Duo Tower and Frasers Tower.

“As these deals were secured in 2018, this again suggests that new demand for CBD Grade A offices in the last few months has been quite limited,” Savills Singapore commented.

This net demand, coupled with a net new supply of 136,200 sqft from 18 Robinson at Robinson Road, meant that the overall vacancy rate for CBD Grade A office space in Savills basket continued to improve in Q3, down 0.7 of a ppt QoQ to 4.9% as of end-September. This is the lowest since Q4 2016.

Compared with the previous quarter, vacancy rates in the Marina Bay, Shenton Way, Tanjong Pagar and Beach Road micro-markets dropped in the range from 0.9% to 4.5%, whilst the Raffles Place, City Hall and Orchard Road areas’ vacancy rates posted an increase from 0.2% to 1.1%.

The sluggish economy is starting to take its toll on the office leasing market. Compared to six months ago, leasing demand has waned, as many office tenants turned cautious for their business and hiring prospects and are holding back their relocation or expansion plans, Savills said.

Data from the Urban Redevelopment Authority’s (URA) revealed that there were a total of 1,283 leasing transactions signed in Q3 2019, down significantly by 16.1% QoQ and on a YoY basis, up just 0.8% compared with the average 9.7% YoY increase for the first two quarters of 2019.

Whilst the lack of demand from traditional office occupiers is expected, tech companies and flexible workplace operators, who have been major demand drivers in the past two years, have also slowed down their pace of expansion, Savills Singapore said. “Weakening demand for office space has also affected leasing activity in some upcoming CBD office projects, resulting in relatively low pre-commitment levels compared with those newer projects completed in the last couple of years,” Loo added.

New co-working facilities
Nevertheless, the third quarter still saw the opening of a couple of new co-working facilities in the CBD. These include Spaces at One Raffles Place Shopping Centre, The Great Room at Raffles Hotel’s shopping arcade, Trehaus at Funan North Tower, WeWork at MYP Centre and One&Co by East Japan Railway Company at Twenty Anson. In total, these co-working centres took up about 195,000 sqft of space

Buying momentum for office properties in the CBD continued in the third quarter. Major transactions concluded in the reviewed quarter include Allianz Real Estate and Gaw Capital Partners’ $1.4b (estimated) acquisition of Duo Tower at Fraser Street; the $655m sale of 71 Robinson Road to SV Robinson; Keppel REIT’s $547.5m sale of its strata portion of Bugis Junction Towers to Village Prop; and Arch Capital’s $210m purchase of Anson House at Anson Road.