Grade A rents smashed through $10 barrier

But CBRE warns that rental growth may be slowing as occupiers digest the significant expansion space taken up last year.

After the sharp upward market adjustments of 2010, we are seeing a more stable market emerging in Q1 2011 as occupiers digest the significant expansion space taken up last year. Although office rents continued to trend upwards, the pace of rental hike has moderated in line with the less frenetic pace of leasing.

Prime rents averaged $8.60 psf/month in Q1 2011, reflecting an increase of 3.6 per cent quarter- on- quarter compared with the 7.2 per cent and 12.2 per cent quarterly increases in Q3 & Q4 2010 respectively.

Prime rents averaged $8.30 psf/month in Q4 2010. Grade A rents averaged $10.30 psf/month, reflecting an increase of 4.0 per cent quarter-on-quarter from $9.90 psf/month in Q4 2010.

There were mixed signals in the office leasing market. Notable leases continued to be concluded during the quarter. This included MND’s 30- year lease to take up 315,385 sf in Lend Lease’s Jurong Gateway project. The mixed- use development is targeted for completion in 2014. ABN Amro and K&L Gates took up 23,000 sf and 13,000 sf each at Ocean Financial Centre (OFC), contributing to the impressive pre- commitment rate of 90.0 per cent, just prior to this 850,000- sf development’s completion in March 2011.

In terms of occupancy levels, the quarter saw mixed performances for the various micromarkets. Vacancy rates in the Core CBD as well Decentralised markets rose while that in the Fringe CBD slid in the first quarter. The vacancy rate for Fringe CBD fell one percentage point to 5.9 per cent in Q1 2011. While the Decentralised market saw a nominal increase from 5.1 per cent to 5.2 per cent this quarter.

OUE Bayfront along with OFC obtained their Temporary Oc cupation Permit (TOP) in Q1 2011. Whilst both buildings were substantially pre- com mitted, these completions nonetheless nudged up the vacancy rate in the Core CBD market from 4.7 per cent in the previous quarter to 5.6 per cent in Q1 2011. Similarly, Grade A vacancy rate rose to 4.8 per cent in Q1 2011. It was 2.7 per cent in Q4 2010. Grade A take- up was 1.03 million sf in Q1 2011, largely due to the contributions from the high oc cupancy levels of the above two new developments.

Around 8.0 million sf of office space is targeted for completion from Q2 2011 to 2015, of which 75.0 per cent is classified Grade A space. A further 1.7 million sf of new schemes will be completed in the balance of 2011, with another 1.4 million expected in 2012. CBRE estimates that 40.0 per cent and 61.0 per cent of the future 2011 and 2012 supply has been pre-let.

CBRE expects a higher volume of secondary space coming onto the market in late- 2011 into 2012 when major occupiers relocate to new premises principally at Marina Bay. It remains to be seen if the market will adequately absorb this sizeable source of secondhand office supply which we calculate totals 1.29 million sf. But it is likely that older buildings will underperform versus Grade A space given the sheer volume of this supply.

Vacancy levels in late- 2011 are likely to rise. These will likely moderate rental growth in the short to medium term.

There was no let- up in the activity level of the office investment market since late- 2010. In Q1 2011, transactions were dominated primarily with owner- occupier deals. There were also purchases by private equity funds as well as for redevelopment purposes. Notably, Capital Square was sold to a joint- venture partnership by Alpha Investment Partners Limited and NTUC Income for $889.00million. This reflected $2,300 psf based on NLA of 386,525 sf, setting a new price benchmark for an investment grade office development within the Core CBD area.

Moray Armstrong, Executive Director, Office Service said, “The outlook remains stable, although it is tinged with an element of uncertainty with events unfolding in Japan. We are expecting a moderate rental growth of between 10.0 per cent and 12.0 per cent for full year 2011 based on a 4.0 per cent to 6.0 percent GDP projection. Rentals are likely to trend upwards over the next three to four yearhorizon, with a low likelihood of excessive rental spikes or indeed sharp corrections anticipated. The market, to us, appears quite balanced”.