Grade A office vacancies soar in Q2 2010

Grade A office vacancy rose from 5.5% in Q1 2010 to 6.4% this quarter but Office Services say this is an anomalous finding.

“This appears to be an anomaly and we anticipate this segment of the market will increase occupancy through the balance of 2010. It should be highlighted that the 650,000 sf MBFC Tower 1, completed in April 2010, represented the only new building that was added to office stock. The building was fully let upon completion,” said Moray Armstrong, Executive Director of Office Services.

In a recent report from CBRE, vacancies across all micro-markets have dropped dramatically in Q2 2010. The vacancy rate for Core CBD area fell from 8.1 per cent to 6.7% this quarter, while the vacancy rate in the Decentralised markets fell from 8.2% to 6.8%. In addition, the Fringe CBD saw a 3.2 percentage point decrease in vacancy rate to 9.6%.

The vacancy rate for Core CBD area fell from 8.1 per cent to 6.7% this quarter, while the vacancy rate in the Decentralised markets fell from 8.2% to 6.8%.

Prime office rents grew 3% in Q2 2010 to average $6.90 psf/month from $6.70 psf/month in the previous quarter. Grade A rents rose 5.6 per cent quarter- on- quarter to average $8.45 psf/month. Average Prime and Grade A rents grew by 2.2% and 4.3% in H1 2010, respectively, after suffering contraction for six quarters.

Rents outside the traditional CBD in areas such as Orchard, Novena, Alexandra and Tampines remained stable for the past two to three quarters, presenting good opportunity for tenants searching for lower cost relocation alternatives.

“Leasing momentum remained strong in part due to pent-up demand from MNCs which were finally in a position to act on their space needs. The virtual year-long hiatus post September 2008 has undoubtedly passed. With confidence restored in late-2009, decision-makers initiated space planning, leading to a pick-up in requirements and in turn increased leasing volume in H1 2010,” said Armstrong.

About 6.9 million sf of offices is scheduled to come on stream in H2 2010 – 2015. The average annual take- up in the past five years was about 1.28 million sf, off an average GDP of 5.0 per cent. With a decent economic outlook, Armstrong said they are expecting the market to absorb new office space averaging 1.50 million sf per annum over the next four and a half year period. Just over 50.0 per cent of the total future supply is already pre- leased.

Armstrong said the absolute volume of supply looks increasingly manageable.

"One can also identify some 1.2 million sf will be redeveloped to other uses from 2011 to post-2013. The redevelopment & conversion of existing office stock and ongoing development of apartments within the CBD will continue the gradual gentrification of older parts of the city’s commercial centre, further reducing the spectre of oversupply. Whilst the focus of leasing activity in the next 12 months if likely to fall on Grade A supply, we are confident that older buildings will attract replacement tenants if rents are set appropriately," said Armstrong.

More office parcels will be released by the government to cater to the needs of the business community. Other than a sole parcel in the Tanjong Pagar micro-market, two other new major commercial sites at Jurong East and Paya Lebar were launched, initiating the government’s vision of creating new decentralised commercial hubs in the eastern and western parts of the island. However, the most noteworthy observation on the GLS H2 2010 programme was what was excluded rather than included. It was surprising that prime development land in the heart of the financial and business district was not made available for tender. Projecting forward four to five years, some early concerns on a potential gap in the office supply pipeline start to emerge.

Armstrong added that the outlook remained favorable as underlying local market conditions and business confidence is strong.

“The only caution at present arises from external macroeconomic issues such as EU debt. This could serve to dampen Singapore’s economic growth, leading to a slightly lower level of leasing activity in H2 2010. Nonetheless, medium-term demand is expected to remain positive as business expands and MNCs continue to view Singapore as one of the few growth stories to help counter the more sluggish markets in Europe and the US,” he said.