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Grade-A office rents in the CBD soften to 0.2% q-o-q growth in 2Q2023
By Cecilia Chow | July 29, 2023

CBD Grade-A office quarterly rental growth has been moderating since 2H2022: from 3.0% q-o-q in 3Q2022 to 0.2% in 2Q2023 (Photo: Albert Chua/EdgeProp Singapore)

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URA's Central Region office rental index recorded a slower q-o-q growth to 2.3% in 2Q2023, following two consecutive quarters of 5.1% q-o-q growth in 4Q2022 and 1Q2023. The pace of growth has slowed, although it's the seventh straight quarter of growth since 3Q2021.

JLL's findings show average monthly gross effective rents for Grade-A offices in the CBD flattening out in 2Q2023, posting a mere 0.2% q-o-q growth. Quarterly rental growth has been moderating since 2H2022: from 3.0% q-o-q in 3Q2022 to 1.2% in 4Q2022 and 1.1% in 1Q2023.

"It's a sign that the Singapore office leasing market is cooling on the back of prolonged macroeconomic headwinds," says Tay Huey Ying, JLL head of research & consultancy. "The dismal economic outlook and the continual downgrades by economists kept occupiers cautious, with the majority opting to simply renew upon lease expiry, or right size to manage costs."

Read also: Apac office occupancy climbs to 88% in 1Q2024, beating Europe and North America: Savills

Challenges in obtaining approval for capital expenditure have curtailed relocation and expansion activities, Tay adds, particularly for firms headquartered in the US and Europe, Middle East and Africa (EMEA).



Some occupiers that took a longer-term view proceeded with deals to upgrade to quality premises. Significant leasing deals in 2Q2023 included US investment bank Morgan Stanley taking up 100,000 sq ft across five floors at the upcoming IOI Central Boulevard Towers and French advertising group Publicis Groupe's move into 55,000 sq ft of office space at Guoco Midtown office tower, which obtained Temporary Occupation Permit in 1Q2023.

"More occupiers are now focusing on space optimisation, and some are rightsizing to a more efficient footprint," says Tricia Song, CBRE head of research for Southeast Asia. These reasons may have led to a higher psf monthly rent in 2Q2023.

Some occupiers that took a longer-term view proceeded with deals to upgrade to quality premises (Photo: Samuel Isaac Chua/EdgeProp Singapore)

Decline in leasing enquiries from large occupiers

Still, leasing enquiries, especially from large office occupiers, have been "noticeably scarce" since the start of 2023, observes JLL's Tay. She expects some ongoing negotiations for mid-to-large pre-leasing deals for projects still under construction to conclude in the coming months. Leasing activity is driven primarily by occupiers with "smallish requirements", she adds.

Office demand from the tech sector, in particular, has slowed to 20% of new leases in 1H2023, down from 46% in 2022, says Wong Xian Yang, head of research for Singapore and Southeast Asia, Cushman & Wakefield (C&W).

The tech sector is still the second-largest driver of office demand. It has been overtaken by the finance sector, which drove 49% of CBD new leases in 1H2023, up from 21% last year.

Read also: Office fit-out costs in Singapore rise to $188 psf, highest in Southeast Asia

“Financial and professional services firms have partially offset a slowdown in tech office demand,” says C&W’s Wong. He adds that as Singapore's wealth management sector expands, professional services such as legal, certification, and training are taking up pockets of office space in the CBD.

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‘Correction mode’ in 2H2023

The supply of office space is set to rise in the coming months, with the impending completion of IOI Central Boulevard Towers yielding 1.26 million sq ft of Grade-A office space and mounting shadow space, says JLL’s Tay.

CBRE's Song notes that the total amount of shadow space within prime office buildings in the Downtown Core "remains quite high" although vacancy has been low. However, "the shadow space may eventually materialise into a higher vacancy rate," she warns. "Global macroeconomic headwinds and corporates' cost-cutting exercises could aggravate the situation in 2H2023."

In the short-term, office demand is expected to lag supply, adds JLL's Tay. She sees landlords of buildings with high vacancy rates under pressure to soften asking rents to attract or retain tenants. "As such, upward pressure on office rents should continue to ease and give way to downward pressure," notes Tay.

Hence, JLL does not rule out the possibility that the CBD Grade A monthly office rents may enter a "correction mode" in 2H2023, dragging down full-year growth to mildly negative territory.

The sell-out of the freehold strata-titled office floors in Solitaire at Cecil at record prices of $4,100 to $4,300 psf could have contributed to the 1.0% q-o-q uptick in the URA's office property price index in 2Q2023 (Photo: TE Capital Partners)

Strata office demand drives office prices – up 1% in 2Q2023

The sell-out of the freehold strata-titled office floors in Solitaire at Cecil at record prices of $4,100 to $4,300 psf could have contributed to the 1.0% q-o-q uptick in the URA's office property price index in 2Q2023 after holding flat in 1Q2023, JLL's Tay points out.

Read also: Apac prime office rents fall 3.2% y-o-y in 1Q2024

"The growing interest in strata-titled office spaces has pushed up capital values, especially with the restriction on future strata subdivision of commercial spaces in selected precincts within the Central Region," says Lam Chern Woon, Edmund Tie head of research & consulting.

The recent changes to the Residential Property Act (RPA) may divert more interest to strata office assets or buildings zoned for commercial use that will not require foreign buyers to obtain purchasing approval for sites zoned Commercial and Residential, adds Lam.

"With high net worth and family offices being the active players in the market, deals could materialise for assets with price tags in the region of $500 million or below," adds JLL's Tay. "This could prop up confidence in the investment sales market and support office prices."

Meanwhile, high interest rates vis-à-vis compressed office yields should keep institutional investors on the sidelines, with big-ticket en bloc office deals staying muted, according to Tay.

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