Flight to quality may cool office rents in places

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Published June 27, 2008

Flight to quality may cool office rents in places

Spiralling rentals almost ground to a halt in Q2 with more cautious economic climate

By KALPANA RASHIWALA


(SINGAPORE) For office tenants in Singapore wearied by steep rental hikes in the past couple of years, some relief is at hand.

The sharp escalation in office rents screeched almost to a halt in the second quarter of this year as a more cautious economic outlook became widespread. Average prime and Grade A office rents edged up just 0.8 and 0.6 per cent respectively in Q2 over the preceding three months, according to latest figures from CB Richard Ellis (CBRE).

'We may see on an average basis, marginal advancement in rentals in second-half 2008 beyond current levels. 2009 will probably be flat, and for 2010 and 2011, we may see office rents easing' as new supply is completed, says CBRE executive director (office services) Moray Armstrong.

Last year, prime and Grade A office rents nearly doubled and that came on top of the 50-plus per cent gains they posted in 2006, on the back of tight office space and strong demand from occupiers including global financial institutions expanding their operations in Singapore.

Alarmed that spikes in office rents in the past two years may threaten Singapore's business competitiveness, the government has been boosting supply.

While new office developments being built are not expected to face difficulty pulling in tenants, vacancies created in older properties from a departure of tenants in a 'flight to quality' will create downward pressure on rents, market watchers say. A lot will also depend on how demand pans out.

CBRE noted yesterday that 'it was evident that the volume of leasing transactions driven by expansion was lower in the past two quarters'. The pace of leasing pre-commitments in new prime office developments has slowed but negotiations are still progressing, the property consultancy said.

'A couple of large occupiers have identified excess space which can be made available for subletting, but at this stage, this has not become a notable trend,' it added.

Mr Armstrong says that the significant number of new developments being built in the central business district (CBD) is likely to lead to a more competitive environment for pre-letting. 'Existing landlords can be expected to adopt more defensive positions, with tenant retention being given greater priority as the completion of new supply is now more imminent.

'Increasing competition from higher-quality new buildings should serve to cap rental appreciation from today's levels,' he adds.

CBRE's figures show that about 10.2 million square feet of new office space will be completed between 2008 and 2012, the bulk of which (6.7 million sq ft) is targeted to be ready in 2010-2011.

Key projects slated for completion in 2010 include Marina Bay Financial Centre (MBFC) Phase 1 and 50 Collyer Quay. The following year will see the completion of MBFC Phase 2, Ocean Financial Centre, OUB Centre Phase 2, Marina View (North Tower) - all in the financial district - and Mapletree Business City in the Alexandra Road area.

To redress the office shortage, the government has not only been selling more sites for development into Grade A projects in the CBD but is also seeking to resolve the short-term supply shortage by releasing 15-year leasehold 'transitional' office sites outside the financial district that can be developed into low-rise projects within a year.

These will cater to tenants that don't need premium office space. As well, vacant state properties are being leased to the private sector for conversion into offices.

Putting the supply numbers in perspective, CBRE says: 'At face value, potential confirmed supply seems abundant, but it should be viewed in context with strong take-up. Some 22 per cent of known supply from Q3 2008 to 2012 is pre-committed, with around 9 per cent under offer.'

Jones Lang LaSalle (JLL) managing director (South-east Asia) Chris Fossick says: 'We expect very strong interest in the new office developments completing over the next few years from tenants wishing to relocate and expand into new high-quality office stock and to meet their corporate social responsibility goal of occupying 'Green Mark' buildings.'

JLL expects prime and Grade A office rents to increase 18 per cent for full-year 2008 but to grow more moderately next year. 'We expect strong take-up of office space over the coming three years due to pent-up demand that has accumulated because of the tight supply over the past couple of years,' Mr Fossick adds.

Office landlord Hongkong Land director (commercial property, South Asia) Robert Garman says that occupier demand for offices on the island has been holding up well against the backdrop of an uncertain global economic environment. 'Commitment levels for MBFC have exceeded our expectations and we feel confident moving forward,' he adds.

CBRE data shows the average monthly prime office rental in Singapore as at Q2 this year was $16.10 psf, just 10 cents higher than the Q1 figure and reflecting a 7.3 per cent increase in the first half of this year (against the end-2007 level). For the whole of last year, the increase was 92.3 per cent.

CBRE's data also showed that the average Grade A office rental stood at $18.80 psf a month in Q2 this year, up 15 cents from the preceding quarter and a 9.6 per cent appreciation for the first half. This is more moderate than the 96.4 per cent hike seen for the whole of 2007.

'Grade A vacancy also remained very tight at 0.6 per cent. No new development will be completed before H2 2009,' CBRE notes.

http://www.straitstimes.com/Money/St...ry_252165.html

June 27, 2008

Office rents nearing peak as supply increases: Report

Impact of US sub-prime crisis, Singapore's rising inflation and weaker growth curbing rentals

By Joyce Teo, Property Correspondent


AFTER more than two years of relentless rises, Singapore's office rents look to be finally peaking as more supply comes on stream.

A CB Richard Ellis (CBRE) report said the impact of the United States sub-prime crisis, rising inflation in Singapore and more modest economic growth have dampened the office sector and slowed rent rises.

Prime office rents edged up 10 cents - just 0.6 per cent - in the second quarter to $16.10 per sq ft (psf) a month on average. The rise over the first half has been 7.3 per cent, way below the 'astounding 92.3 per cent' for the whole of last year, said CBRE.

CBRE executive director office services Moray Armstrong said: 'Our sense is that the natural ceiling is close at hand.'

While there is resistance over rents from a number of occupiers, an encouraging sign is that there are still many ongoing negotiations, he said.

'Selected buildings may achieve higher rents but across the board, rentals are as high as they can go.' These are top-grade properties with rents of over $20 psf - though it is believed they are mostly for small offices.

Rents of top office buildings rose 9.6 per cent in the first half compared with 96.5 per cent in the whole of last year. Such Grade A rents averaged $18.80 psf a month in the second quarter, up from $18.65 in the first period.

Cushman & Wakefield managing director Donald Han said it was only a matter of time before rents peaked as they rose too fast and too soon last year.

'However, while office rents may have peaked, they will probably stay at the current levels for the next 12 months given tight supply,' he said.

A supply shortage over the past two years has prompted firms to try various means to save space or costs.

Some companies, facing a doubling or tripling of rent when leases were due for renewal, moved out to more affordable spaces in suburban areas or industrial locations.

And the search for lower-cost space continues. There is, for example, said Mr Armstrong, heightened interest for upcoming space in the Alexandra and Harbourfront areas.

Mr Han added that rents are also facing limited upside as many companies already made expansion plans and arranged for extra space last year.

Citigroup agreed in a recent report, saying that slowing demand and decentralisation are likely to start putting downward pressure on both rental and capital values. It tipped office rents to fall 30 to 35 per cent.

According to CBRE, the vacancy of Grade A space - now 0.6 per cent - will remain tight as no new top-grade office developments will be completed before the second half of next year.

But there is some relief in sight.

The vacancy rate for fringe areas rose from 4.6 per cent to 7 per cent in the April to June quarter because of new completions such as VisionCrest and the refurbished 111 Somerset in the Orchard Road area.

The Government has also introduced transitional office sites to help ease the shortage.

There will be about 10.2 million sq ft of new space coming on stream between now and 2012, with the bulk likely to be ready in 2010 to 2011, said CBRE. About 63 per cent of this will be in Grade A properties in the core downtown area.

Still, the supply should be viewed in context with the strong take-up rate, said CBRE. About 22 per cent of known supply from now to 2012 has already been pre-committed.

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