Grade-A office rents to moderate as occupiers turn cautious

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The rental index of Singapore’s Urban Redevelopment Authority (URA) recorded a sharp 4.9% quarter-on-quarter (q-o-q) jump in 3Q2023, twice the 2.3% q-o-q growth recorded in the preceding quarter.

Tay Huey Ying, JLL head of research and consultancy for Singapore, believes that the jump could largely be attributed to lease deals that have been concluded several quarters ago when occupier demand was strong, underpinned by the explosive growth of the technology sector.

However, median rents in 3Q2023 fell for the first time in five quarters for Category 1 office space, defined as buildings in the Core Business District, including the Downtown Core and Orchard Planning Area. These buildings are usually modern, recently refurbished and have large floor plates and gross floor area, commanding relatively high rents. The median rents declined by 2.3% q-o-q.

Median rents for Category 2 office space, defined as office space outside of Category 1, have also fallen for the first time in eight quarters, down by 4.5% q-o-q.

JLL found that CBD Grade-A office rents also declined in 3Q2023, recording a 0.3% q-o-q dip to $11.29 psf per month (pm). This ended nine quarters of consecutive growth. According to Tay, tenants took advantage of the soft leasing market by negotiating for more favourable rental terms. To encourage occupancy, landlords are also sub-dividing larger spaces into leasable units, providing ready-fitted units and adjusting their rental expectations to meet the market.

According to Wong Xian Yang, Cushman & Wakefield head of research for Singapore and Southeast Asia, the Downtown Core saw a net office demand of 398,264 sq ft in 3Q2023. This is the strongest q-o-q growth in net demand since 1Q2020. The rest of the Central area, covering places such as Outram, River Valley, Rochor, Newton, Orchard and Rochor area, saw a net demand of -161,459 sq ft in the same quarter.

Again, financial and professional services were the main demand drivers of office space, with the sector claiming 58% of the new leases in the CBD in the first nine months of 2023. Private wealth, asset management and consumer goods were the other active sectors observed in 3Q2023. This helped occupancy levels rise from 89.2% in 2Q2023 to 90% in 3Q2023, as about 0.45 million sq ft was removed from the stock due to project redevelopments.

Generally, CBRE Research forecasts Grade-A office rents in the Core CBD to grow by 1.5%-2% for the whole year, although slower than the 8.3% rental growth seen in 2022. However, Cushman & Wakefield’s Wong expects rental growth in the Central area to moderate amid an expected higher-for-longer interest rate regime and global economic uncertainties. The supply pressure could also come from the completion of two projects in the CBD next year – IOI Central Boulevard Towers (1.3 million sq ft) and Keppel South Central (0.6 million sq ft).

With the emergence of substantial secondary stock in the Central Region next year, Wong believes occupiers will remain cautious and opt for the higher lease renewal activity instead of relocation. He also points out that in 3Q2023, there were only 57 office strata transactions within the Central Region – the lowest since 3Q2020.

Central Region shifted up 0.8% q-o-q in the same quarter, but overall transaction volume remained low due to high interest rates.

Overall, the demand drivers of office space have become increasingly diversified, enabling the market to come through the economic uncertainties. With the sheer amount of office space entering the market in 2024, landlords are expected to adjust their rental expectations to meet the market conditions.