The office sector was the one bright spot in the real estate market in 2018. Average gross monthly rents for Grade-A office space in the CBD rose 10.8% in 2018, according to preliminary estimates by JLL Research — from $9.17 psf in 4Q2017 to $10.16 psf in 4Q2018. It surpassed the 7.6% rental growth in 2017. As a whole, Grade-A office rents in the CBD have recovered by 20.8% from the recent bottom of $8.41 psf in 1Q2017, says JLL.

“The outlook is positive,” says Chris Archibold, JLL head of leasing. “Grade-A office rents in the CBD have been rising at 2% to 3% a quarter over the last 12 months. It will continue to trend upwards because of the undersupply in the market over the next few years.”

The dearth of new Grade-A supply in the CBD in 2019, coupled with the withdrawal of Chevron House for refurbishment, will further tighten supply, putting increased upward pressure on rents, according to JLL Research. However, the availability of new supply outside the CBD should help relieve some pressure and cap CBD Grade-A rental growth.

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Capital values for Grade-A office space in the CBD rose 12.2% y-o-y in 2018: from $2,463 psf in 4Q2017 to $2,763 psf in 4Q2018. This is faster than the 10.6% increase in 2017. CBD Grade-A office space has therefore seen capital values recover 25.2% from the recent bottom of $2,206 psf in 1Q2017. JLL Research says, “Demand-and-supply fundamentals are supportive of continued steady growth in capital values in 2019.”

Rapid expansion of co-working, flex-space operators

Demand for office space in the Downtown Core came up to 1.3 million sq ft in the first nine months of 2018 — surpassing the one million sq ft for all of 2017 (See Chart 1), according Mark Lampard, head of regional tenant representation, Southeast Asia, at Cushman & Wakefield (C&W).

Chart 1: Annual demand for office space (2010-2018YTD)

Demand was driven by the rapid expansion of co-working operators, with Hong Kong-based Campfire signing on for an entire 11-storey building of 85,000 sq ft at 139 Cecil Street, a redevelopment of the former Cecil House. Singapore-listed property giant CapitaLand took a 50% stake in The Work Project, which has leased 41,000 sq ft in Asia Square Tower 2 and 31,000 sq ft in Capital Tower, according to C&W. In October, a joint venture between CapitaLand and The Work Project bought out Collective Works’ co-working space at Capital Tower, which occupies an entire floor plate of close to 22,000 sq ft.

Co-working or flexible-space (flex-space) operators have been a force to be reckoned with, and were a major source of demand for office space. CBRE expects leasing momentum from this segment to continue into 2019. “The scale of individual leasing deals by co-working operators is increasing and we can expect a few players signing deals in the 50,000-to- 75,000 sq ft range,” says Moray Armstrong, CBRE managing director of advisory and transaction services, Singapore.

Start-ups, tech firms dominate

The start-up scene in Singapore has been vibrant. CBRE Research estimates that Singapore-based start-ups have received a total of US$4.65 billion ($6.37 billion) in venture capital funds.

“Most of these start-ups are generally going into co-working spaces managed by third-party flex-space operators,” says JLL’s Archibold. “We have seen some come out of these co-working spaces and move into more traditional office space, but that wave is still relatively new. Most of these flex-space operator are expanding their portfolios so they can accommodate the expansion of these start-ups as they grow.”

Technology firms are still active in expansionary activity. “Technology occupiers have been at the forefront of much of the leasing excitement in both the office and business park sectors over the past two years,” notes CBRE’s Armstrong.

Several large technology players are looking to expand their presence in Singapore for their Southeast Asia operations while many smaller ones continue to locate in Singapore because of its business-friendly environment. More major tech companies, including those from China, are expected to come to Singapore next year, says Armstrong.

While Grade-A space is preferred, rising rents mean that smaller players or start-ups are willing to widen their office options to include Grade B/B+ offices in choice locations, according to CBRE Research.

There was also a resurgence of demand from tenants in the financial sector, notes C&W’s Lampard, with HSBC Bank concluding a deal to relocate and take up 140,000 sq ft at Marina Bay Financial Centre (MBFC) Tower 2 in 2020. In addition, Allianz inked a lease for 50,000 sq ft in ASB Tower (a redevelopment of the former CPF Building) on Robinson Road by Ascendas SingBridge.

Limited supply until 2022

Grade-A office supply in the CBD was limited, with the completion of Frasers Tower in 2Q2018 adding 663,000 sq ft to the market. Supply in 4Q2018 consists solely of 18 Robinson with 136,000 sq ft. “Supply will remain low at an annual average of 700,000 sq ft from 2019 to 2021 — well below the 10-year annual average of 1.2 million sq ft,” adds C&W’s Lampard.

The expected completion of 9 Penang Road and Funan in 2019 will inject 557,000 sq ft. This will be followed by the completion of ASB Tower, Afro-Asia i-Mark and Hub Synergy Point in 2020, which will add 782,000 sq ft in the CBD. The year 2021 will mark the completion of CapitaSpring (redevelopment of the former Golden Shoe Carpark) with 635,000 sq ft of prime office space (see chart).

“With the newly completed projects enjoying high occupancy rates, owing to increased leasing demand, the office market is now firmly tilted in landlords’ favour,” says Lampard.

The next large wave of supply will come in in 2022, with the completion of Central Boulevard Towers and Guoco Midtown, which will inject 2.2 million sq ft of premium Grade-A office space.

Chart 2: Grade-A Office Supply (4Q2018-2022)

Rejuvenation of Beach Road-Bugis area

The Beach Road-Bugis area has undergone dramatic rejuvenation over the last few years, especially with the completion of South Beach and DUO. Beach Centre, located opposite South Beach, has also been revived with the opening of WeWork’s flagship space in December 2017.

The historic Raffles Hotel is undergoing an extensive makeover, and scheduled to reopen in mid-2019.

When completed, Guoco Midtown and the redeveloped Shaw Tower will reinforce the status of Beach Road-Bugis area “as a vibrant commercial hub”, complementing the Marina Bay and Raffles Place business districts. “There is no doubt that the Beach Road corridor has been transformed by the quality new developments that have come online,” says CBRE’s Armstrong. “This micro-market offers increasing attraction to MNCs and the quality of the tenant mix has improved markedly.”

The tenant profile at South Beach and DUO shows that the Beach Road-Bugis area appeals to “a broad mix of companies — from banks to tech companies”, observes JLL’s Archibold.

Recent tenants at South Beach include business consultants FDM Group, financial institution Sino Suisse Capital and online video firm Brightcove, according to Corporate Locations in its September Office Market View. Duo Tower’s latest tenants include Arab Bank; cleanroom and clean air devices provider Quest Technology Systems; and internet security firm SonicWall.

Upward trajectory in office rents

All signs point to office rents maintaining their upward trajectory over the next two to three years, albeit at a more measured pace than the early part of the rental recovery cycle. CBRE Research is projecting an 8% to 10% growth in Grade-A office rents in the CBD Core in 2019.

Demand looks relatively stable while pipeline supply is moderating, all of which are positive indicators. “Singapore’s office market approaches 2019 in pretty decent health,” says CBRE’s Armstrong. “We believe the market-strengthening phase will continue through next year, underpinned by a decent level of occupier demand, limited new supply and declining vacancy levels.”

The only dark cloud on the horizon is the on- going US-China trade conflict. Negative effects of the trade war are already being felt. “Manufacturing and export growth seem to have slowed, dragged down by greater uncertainty in global markets,” notes Desmond Sim, CBRE Research head of research for Singapore and Southeast Asia. Should the conflict worsen, it could have a negative impact on business expansion and investment plans, he cautions, which could, in turn, affect office demand.

Chart 3: Grade-A office rents are on an upward trajectory

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