According to the latest real estate market statistics released by URA on Oct 28, the price index of the office market contracted 2.7% q-o-q in 3Q2022. This was a slightly better performance compared to the 5.1% q-o-q decline that had been recorded in 2Q2022.

Meanwhile, rentals of office space saw a quarterly increase of 2.1% in 3Q2022 against the 2.4% q-o-q increase in the previous quarter. Across the first nine months of this year, the office rental index has improved by 6.3%.

At the same time, office occupancy levels inched upwards to 88.3% in 3Q2022 from 88.0% in 2Q2022.

“The increase in rental coupled with an improvement in office occupancy level characterises an increasingly landlord's market since the middle of 2022. This dynamic will continue into 2023 as occupiers are still on the lookout for quality office space in the CBD area where supply remains tight,” says Leonard Tay, head of research, Knight Frank Singapore.

Based on a basket of key office properties in Singapore tracked by Colliers, rents of the core CBD premium and Grade A subsegments grew by 1.8% to $11.30 psf per month in 3Q2022 from the preceding quarter.

The buoyant performance is “underpinned by occupiers’ preference for better located and higher quality office buildings, as well as increases in service charges,” says Catherine He, head of research, Singapore at Colliers.

Her sentiment was echoed by Lam Chern Woon, head of research and consulting at Edmund Tie. “Leasing demand for office spaces across the board is underpinned by co-working operators looking to ink longer term leases for large spaces in key office addresses, both in the CBD and in the Fringe Area,” says Lam.

The latest URA statistics also show that the pipeline supply of office space fell 1.2% from about 9.34 million sq ft in 2Q2022 to 9.23 million sq ft at the end of 3Q2022.

The total amount of occupied office space island-wide grew slightly by 258,240 sq ft in 3Q2022, a similar occupancy increase that was also recorded in 2Q2022.

According to research data from Edmund Tie, net absorption for office buildings in the Central Region remained positive at 161,400 sq ft in 3Q2022, a drop from the previous quarter which stood at 258,240 sq ft.

Meanwhile, the net absorption for office buildings in Downtown Core saw a second consecutive quarter of increase at 182,920 sq ft, up from 118,360 sq ft in 2Q2022, reflecting strong leasing demand for offices in the CBD, says Edmund Tie.

However, the total stock of office space fell 21,520 sq ft last quarter, and as a result, the island-wide vacancy rate of office space decreased to 11.7% at the end of 3Q2022. The vacancy rate was 12% at the end of the preceding quarter.

“Colliers has observed weaker leasing enquiries in 3Q2022 and the availability of higher quality offices in the Core CBD remains tight due to a lack of new supply and ongoing withdrawal of existing office stock for redevelopment,” says He.

Despite looming economic headwinds, key sectors such as banking, finance, real estate, and insurance are still optimistic and might continue expanding their employment and headcount, says Tay.

“With occupancies steadily tightening and leasing activity to remain firm for the rest of 2022, growth in rents for the whole of the year and into 2023 is expected to continue,” he says.

“On the supply front, the availability of good quality office stock in the Core CBD remains tight. This is due to a lack of new supply coming onto the market, as IOI Central Boulevard Towers will only be completed in 2H 2023,” says He.

As a result, she notes that some landlords might have been emboldened to raise asking rents in the coming quarters.

In addition to the tight pipeline of office stock, some landlords are passing on increasing operational costs to tenants in the form of higher service charges, resulting in higher gross effective rents, says He. Based on Colliers’ research, service charges in some office buildings have increased by between 10% and 30% in recent months.

“The tech sector, a key source of office demand, would be weighed down by tightening financing conditions as they adopt a wait-and-see stance and assess market liquidity,” says Wong Xian Yang, head of research, Singapore at Cushman & Wakefield.

Wong adds that the long-term prospects of tech firms remain unchanged and well-financed and growing tech firms could still drive pockets of demand.

“Overall, office rents are expected to continue its positive momentum as the rental recovery is entrenched, although the pace of recovery will moderate next year due to economic headwinds, rising business caution and greater office supply coming onstream,” says Lam.

Edmund Tie expects office rents in the CBD to record a full year growth of 3-7% this year, before moderating to 2-5% in 2023. On the other hand, Colliers expects that office rents for the whole of 2022 will increase by 6-7%.