Office REITs brace for trouble as Grade A rents head south

Occupancy will drop drastically, analysts warn.

Office REITs are headed for trying times ahead as a massive supply of Grade A office supply will constrain landlords’ ability to hike rents.

A report by RHB highlighted that almost 4 million square feet of new office space will enter the market next year. Based on statistics by the Urban Redevelopment Authority, RHB said that it will take over four years to absorb the sharp supply spike.

“Given the weak global and Asian economic environment today, we are expecting occupancy levels to drop drastically as the huge office supply flows into the market,” RHB said.

RHB expects office REITs to register negative rental reversion, as rental rates for grade A offices are forecasted to slide by over 15% by the end of 2016 compared to current levels.

“For the past two years, the office rental market has seen higher rental growth rate mainly due to the crunch in office supply. However, looking a year forward, we do not think that office REITs will be able to sustain a high growth rate,” RHB said.