SINGAPORE (EDGEPROP) – Singapore’s Office Price Index fell 2.4% y-o-y in the 3Q2021, reversing from the 0.9% y-o-y increase in the 2Q2021, according to the real estate statistics released by the Urban Redevelopment Authority (URA) on Oct 22.

The price index, which fell to 118.2, marks the lowest level since 2011, notes Leonard Tay, head of research at Knight Frank Singapore.

“This was likely the result of a k-shaped recovery in the office market, with grade A and B buildings bottoming out due to flight-to-quality trends and demand from technology firms, while older, less favourably located buildings lose tenants as corporates right-size or upgrade to better locations,” Tay writes.

Some of the older buildings located on the fringe of the central business district (CBD) may also be targeted for redevelopment in 2022 as developers may take advantage of market conditions, as well as the CBD incentive scheme to repurpose the projects into mixed-use developments, he adds.

Office space rentals also declined 3.5% y-o-y in the 3Q2021, compared to the 1.3% y-o-y increase in the quarter before.

However, the decline was not uniformly spread across all office buildings, says Tricia Song, head of research, Southeast Asia, at CBRE.

A look at median rentals based on contract date showed that rents in Category 1 office spaces continued to trend upwards for the second straight quarter, while rents in Category 2 office spaces fell at a faster pace of 1.7% q-o-q from the 1.0% q-o-q decline in the previous quarter.

“With the ongoing ‘flight to quality’ moves, there has been a slow but steady increase in the commitment levels of some existing and pipeline projects. Among them, the beneficiaries are new developments with high quality specifications. As a result, the improved confidence amongst some landlords led to higher rental expectations. As such, this contributed to the accelerated rental growth in the Grade A segment,” writes Song.

She adds that most of the leasing transactions in the 3Q2021 comprised renewals and “flight to quality” moves, which allows firms to adopt the hybrid working model while reassessing their space requirements.

The move may eventually result in space returning to the market, which is “particularly pronounced amongst consumer banks”, says Song.

During the 3Q2021, the amount of occupied office space fell by 5,000 sqm nett, compared to the 23,000 sqm decrease marked in the 2Q2021.

The stock of office space grew by 26,000 sqm in the current quarter, compared to the 34,000 sqm increase in the quarter before. This, according to the analysts, is likely attributable to the completion of the office component in CapitaSpring.

In the same quarter, the island-wide vacancy rate of office space increased to 12.9% as at the end of the 3Q2021, up 0.3 percentage points from the 2Q2021’s 12.6%.

This comes despite the positive rental growth for Category 1 office spaces, says Wong Xian Yang, head of research, Singapore at Cushman & Wakefield.

To Wong, the increase in Category 1 office rents “reflects landlords’ optimism about the recovery of the office market especially for Grade A office spaces amidst the current flight-to-quality trend and economic recovery”.

“Grade A office landlords have held on to their asking rents in anticipation of recovering demand. Financial and tech tenants are still looking to expand their office footprint as their headcount continues to increase,” he says.

That said, the demand for offices is gravitating toward the better developments, with landlords of Grade B and C, and even a few of the weaker and older Grade A offices offering incentives such as fit out subsidies for new leases, notes Wong.

The way Knight Frank Singapore’s Tay sees it, the office market should continue to benefit from the economic recovery in Singapore.

“Barring the outbreak of a new variant or a drastic worsening in Intensive Care (ICU) cases, office rents in prime CBD locations should improve cautiously by 1%–2% in the last quarter of 2021, before rental growth steadies and picks up pace, possibly increasing by up to 5% in 2022,” he says.

CBRE’s Song is similarly buoyant on the outlook on the office market, noting that the extension of the Stabilisation Phase till Nov 21 is unlikely to have a negative impact on the sector.

“Underpinned by tight vacancy, the mid-term outlook for the office market looks sanguine. Coupled with the limited number of options over the next three years, and the rapid expansion in demand from the technology sector, CBRE Research expects further rental growth in the mid-term,” she says.

JLL’s Singapore head of research and consultancy, Tay Huey Ying, says she is “optimistic” that demand for office space in the country will remain healthy.

This, she adds, is “anchored on its integral role as the primary place of work”.

“Singapore’s attractive offerings as a global office hub should also see her continuing to draw technology firms, wealth management and family offices amongst others, to set up offices in the city. Meanwhile, CBD office supply growth is set to slow and could even shrink in the medium- to long-term given the lack of greenfield sites for new developments and the ongoing redevelopment of ageing office assets into mixed-use projects,” she continues.

To this end, JLL’s Tay views that Guoco Midtown and Central Boulevard Towers could “possibly be the last of fresh office injections on greenfield land within the CBD in the coming decade if the government focuses on releasing land outside the CBD in their efforts to develop suburban hubs to bring jobs closer to homes”.

To Cushman & Wakefield’s Wong, the flattening out of negative net demand “could be indicative that the broad office market could be bottoming out”.

“The growth in Grade A office rents, tight supply pipeline amidst ongoing redevelopments and expected stronger future office demand due to economic recovery and tenant displacements would provide tailwinds for the office market,” he says.

As at the end of 3rd Quarter 2021, there was a total supply of about 755,000 sq m gross floor area (GFA) of office space in the pipeline, compared with the 697,000 sq m GFA of office space in the pipeline in the previous quarter.