URA's quarterly report on Jan 25 showed that Singapore's office property market ended 2023 on a subdued note. Commercial office prices for 4Q2023 dropped 5.9% q-o-q, reversing the 0.8% q-o-q uptick in 3Q2023. 2023 closed with a net decrease of 4.2% in office prices.

"JLL had started to observe weakening occupier demand as early as 2Q2023," says Tay Huey Ying, head of research and consultancy at JLL Singapore. "The downcast global and domestic economic outlook at the start of the year, coupled with the higher-for-longer interest rate environment, had kept occupiers wary and saw many corporates shelving expansion and relocation plans to manage costs."

The steep 5.9% q-o-q fall in the URA office property price index in 4Q2023 following three consecutive quarters of lacklustre growth is not surprising, considering "the immense asset repricing pressure that has built up arising from the negative yield spread over borrowing costs for most office assets in the prolonged elevated interest rate environment", adds Tay.

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Office rents in the Central Region increased just 0.3% in 4Q2023, the lowest quarterly growth for 2023, after a 4.9% q-o-q bump in 3Q2023, notes Tricia Song, CBRE head of research for Singapore and Southeast Asia. For the full year, office rents were up 13.1% in 2023, faster than the 11.7% increase in 2022.

Given the higher capital expenditure and interest rates, some occupiers were renewing existing leases at higher reversionary rents rather than relocating, says Song. She adds that space availability remains "extremely tight due to limited supply".

"Selected premium office space with quality specs in the Core CBD was also highly contested among competing tenants, leading to rental escalation," says Song. She notes that shadow spaces in prime areas such as Marina Bay and Raffles Place proved attractive to occupiers seeking high-quality, fitted-out office spaces.

Meanwhile, according to Song, some shadow spaces were taken off the market as tech occupiers decided to retain their office premises, further contributing to the shortage. With the lack of supply, based on URA data, the market saw a positive net absorption of 0.1 million sq ft, following the additional 0.25 million sq ft absorption in 3Q2023. The island-wide vacancy was 9.9% in 4Q2023, down slightly from 10% in 3Q2023.

Core CBD (Grade-A) rents grew by 1.7% y-o-y, moderating from the 8.3% rental growth in 2022, notes CBRE Research. "The market may face a slower 1H2024 with an above-historical average completion pipeline in 2024 and potential secondary spaces, which could lend to a temporary increase in the availability of spaces," notes Song.

Soft occupier sentiment will likely linger with layoffs announced at the start of the year in giant companies like Lazada, Google, YouTube, Amazon, Tencent Holdings’ Riot Games and even Unilever. "However, experience has shown demand for office space to be capable of a quick rebound on improved economic conditions," says JLL's Tay.

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Singapore's economy showed signs of a nascent recovery, based on advanced estimates by the Ministry of Trade on Jan 2, with 4Q2023 GDP growth of 2.8% y-o-y from 1.0% y-o-y in 3Q2023. "The extension of this recovery into 1H2024 could lift business confidence and unleash pent-up demand in 2H2024," Tay adds. "Occupiers who held back on relocation or expansion plans in 2023 could restart new lease negotiation conversations. Should this pan out, office rents could firm and potentially trend up in 2H2024."

Sentiment could pick up in 2H2024 as interest rates and inflationary pressures ease, according to CBRE's Song. With flight-to-quality and flight-to-green trends to continue, CBRE Research expects Core CBD (Grade-A) rents to grow at a moderate pace of 2%-3% in 2024.

Investors waiting on the sidelines are starting to re-enter the market with the end of the Fed rate hike cycle. The successful sale of VisionCrest Commercial in Orchard to the consortium comprising TE Capital Partners, LaSalle Investment and Metro Holdings in November 2023 could pave the way for more office deal-making, thus supporting upside in asset prices by 2H2024.

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