Falling rents, supply glut haunt office market

By Michael Lim

/ The Edge Property |

January 26, 2016 10:00 AM SGT

Of all the real estate sectors, the office market is the most cyclical in nature, and the first to correct in times of stress. Grade-A office rents have fallen by some 14% for 2015, bringing gross effective rent down to around $10.38 psf per month, says Chris Archibold, JLL’s head of markets. He sees Grade-A office rents tumbling a further 2% to 3% per quarter in 2016, bringing overall decline to 8% to 12%. This means that next year’s average Grade-A office rent could drop to between $9.10 and $9.50 psf per month. The last time rents hit these levels was in 2012/13 (see Chart 1).

Coupled with falling rents is the record amount of new Grade-A office space — almost 4 million sq ft in all — entering the market in 2016 (see Chart 2). “The last time there was a deluge of Grade-A office space was between 2008 and 2011, when a total of 7.6 million sq ft came on stream, with 2.4 million sq ft completing in 2009 alone,” recounts Christine Li, head of research at Cushman & Wakefield.

Chart 1

Source: JLL Research

Chart 2

Source: Savills Research

Oversupply in 2016? Significant schemes to be completed next year include Guoco Tower, the office tower of GuocoLand’s Tanjong Pagar Centre, with 890,000 sq ft of Grade-A office space. M+S is also expected to complete both DUO and Marina One by 2H2016, which will yield another 560,000 sq ft and 1.88 million sq ft of Grade-A office space respectively.

Between 2017 and 2019, new Grade-A office schemes to be completed include Frasers Centrepoint’s Frasers Tower on Cecil Street, which will add another 664,000 sq ft, and Tuan Sing’s Robinson Tower, with 140,000 sq ft. Ascendas, which purchased the former CPF Building on Robinson Road last month, has plans to redevelop the site into a new development with a gross floor area of around 600,000 sq ft, which could enter the market after 2020.

Despite the spectre of looming office oversupply, the URA launched a 117,000 sq ft white site at Central Boulevard on the Reserve List of the 2H2015 Government Land Sales programme on Dec 16. The site is next to the Downtown MRT station. Of the 1.52 million sq ft of gross floor area expected from this site, slightly over one million sq ft may be allocated for office use. However, if the site is triggered for sale next year and is awarded, the new scheme will only be completed sometime between 2021 and 2023. By then, the bump in supply would have been absorbed, says JLL’s Archibold.

Nevertheless, with the gross development cost estimated to be at least $2.5 billion, given the size of the scheme, and a projected 10.7 million sq ft of office space to come on stream from 2016 to 2019, “interested developers would be closely watching the take-up of the commercial space currently under development,” says Nicholas Mak, executive director of research and consultancy at SLP International.

Marina One, expected to be completed in 2H2016, will add 1.88 million sq ft of Grade-A office space

Impact of financial institutions downsizing Financial institutions have traditionally been the biggest occupiers of Grade-A office space. They occupy about 60% of prime office space today. However, institutions such as Barclays Bank, Credit Suisse, HSBC, Standard Chartered and UBS have been consolidating their operations and have announced staff cuts. “An estimated 300,000 sq ft of shadow space could potentially be added to the market as financial institutions continue to scale back,” reckons Archibold. “The consolidation could continue for another 18 months amid the global market uncertainties.”

Even though the tenant mix in the Grade-A office space in the CBD is more diversified today, with the likes of accounting firms, legal firms, technology and social media companies moving into prime office space, there is no one industry that can replace financial institutions in terms of space occupied. For instance, Facebook has moved into South Beach, Twitter has taken up space at Capita- Green and Linked In has moved to Marina Bay Financial Centre Tower 2. The combined space occupied by Facebook, Twitter, Apple and LinkedIn total about 300,000 sq ft, which is still less than Standard Chartered’s total office space of over 500,000 sq ft, says JLL’s Archibold.

Tenants in the CBD with office space requirements of over 50,000 sq ft make up just 30% of the market, while those with space needs between 30,000 and 50,000 sq ft account for another 20%, he estimates. The balance 50% is made up of smaller tenants who occupy Grade-B buildings, which therefore continue to have healthy occupancy rates. “However, these buildings will have to compete on rents as most of the tenants are cost-conscious,” he adds.

Therefore, despite the huge Grade-A supply overhang in 2016, older Grade B buildings still have a vital role to play, says Alan Cheong, head of research with Savills Singapore. Small and medium-sized enterprises cannot afford Grade-A office rents have therefore taken up space in the CBD on Cecil Street and Robinson Road, he adds.

Office rents will continue to come under pressure next year, says Archibold. “While it is going to be a tough market for the next 12 to 18 months, I think things will start to pick up after that.”

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This article appeared in the City & Country of Issue 709 (Dec 28, 2016) of The Edge Singapore.

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