The death of offices may have been greatly exaggerated

Feb 03, 2022

WHILE there's no denying that the pandemic has turned working from home (WFH) into a permanent fixture, the death of the office - and Central Business District (CBD) Grade A offices, in particular - may have been greatly exaggerated.

According to Tay Huey Ying, head of research & consultancy for JLL, CBD Grade A office rents may come under "immense upward pressure, tapering only when new supply outside of the CBD, such as the Jurong Lake District (JLD), comes onstream", potentially from 2027 or 2028 onwards. Once fully developed, office space in JLD could multiply to 1.4 million square metres (sq m) over the next 2 decades, up significantly from 200,000 sq m currently.

For now, Tay said, supply is tight in the CBD, with no new state tenders lined up for the district in the coming years. Meanwhile, demand for office space is far from cratering - supported by tech companies and asset managers, including family offices. Over the past 2 years, even as banks such as DBS and Citigroup have relinquished space, tech names such as ByteDance and Amazon have stepped in to soak it up.

There is also a flight to quality, with companies making a beeline for the best office buildings.

Software company Red Hat has leased nearly 60,000 sq ft of space at CapitaSpring - which achieved its temporary occupation permit last year - as it relocates from AXA Tower, which is undergoing redevelopment.

Analysts also expect spillover benefits from multi-national corporations shifting their employees out of Hong Kong, which has enforced strict travel restrictions, and over to Singapore. According to a recent Reuters report, Bank of America is mulling plans to relocate workers to Singapore.

Tay added: "Considering the government's decentralisation plans, intervention to ease CBD rent growth is likely low, and this could result in CBD Grade A rents hitting new highs" in the mid to long term. The last peak was achieved in the second quarter of 2008, when CBD Grade A office rents hit S$15.27 per square foot (psf).

In the fourth quarter of 2021, rents for CBD Grade A offices tracked by JLL rose for the third consecutive quarter - by 1.8 per cent quarter on quarter for an average monthly gross effective rent of S$10.23 psf.

By 2026, JLL estimates monthly average rents for CBD Grade A offices could be up by over 30 per cent. Barring unforseen circumstances, Tay reckons 2022 CBD Grade A rent growth could be more than double the 4.2 per cent chalked up in 2021.

At the same time, office building owners are redeveloping older assets in the CBD. Some are taking advantage of schemes such as the CBD Incentive Scheme, which was rolled out to inject more buzz in the CBD. Under this scheme, developers with predominantly ageing office buildings in certain parts of the CBD are encouraged to redevelop them into mixed-use projects with residential or hotel components. Owners would be allowed to build more gross floor area (GFA) as a sweetener.

City Developments (CDL) is redeveloping the former Fuji Xerox Towers at Anson Road into a 46-storey mixed-use integrated development. Of the 655,000 sq ft in GFA - possible thanks to a 25 per cent GFA uplift under the CBD Incentive Scheme - 40 per cent will be set aside for offices and retail, 25 per cent for serviced apartments and the remaining 35 per cent for residential.

JLL estimates nearly 2 million sq ft of office space in the CBD is already undergoing redevelopment, or has obtained planning permissions to do so. Among the buildings on this list are Keppel Towers and AXA Tower.

"Construction delays have also put the squeeze on CBD office supply," DBS analyst Derek Tan said. Supply from Guoco Midtown along Beach Road may only come onstream by end 2022 or early 2023, and IOI Central Boulevard Towers in Marina Bay may do so in 2024.

There could be shadow space as a result of downsizing. But a potential 20 per cent from expiring leases in FY22-FY24 of up to 800,000 sq ft is manageable and can be easily absorbed, a report by DBS analysts Rachel Tan and Derek Tan said.

And while the office of the future will undoubtedly look different as flexible working takes centrestage, analysts say there is still very much a need for a physical space for employees to meet and collaborate.

Even Grade B office buildings are expected to receive a lift from the rising tide.

RHB analyst Vijay Natarajan said: "When the gap between Grade A and B rents becomes too large, Grade B rents will also move up. Still, we believe in the next 1 to 2 years, the gap will still continue to be wider compared to the past." According to Colliers, that gap stood at 19 per cent in the third quarter of 2021, versus 12 per cent in 2015.

Companies that are consolidating their office footprint will look to Grade A offices, which tend to have bigger floor plates than Grade B spaces, added Natarajan. "Employees, along with businesses, are also placing a lot more emphasis on environmentally friendly buildings, and companies are likely to pay a premium. Grade A offices are in a better position to benefit from that."

Analysts say that beneficiaries of a rebound in the Grade A office segment include Keppel Reit, CDL, UOL and Suntec Reit. CapitaLand Integrated Commercial Trust, while not a pure office play, will also benefit.

The progressive recovery in Singapore's economy, sanguine sentiment, as well as tight supply already led to office rents picking up last year. Figures released last week by the Urban Redevelopment Authority (URA) showed the overall office rental index increased 1.9 per cent for 2021 as a whole, after retreating 8.5 per cent in 2020. The island-wide vacancy rate dipped to 12.8 per cent as at end-Q4 2021, from 12.9 per cent in Q3.

At the same time, some occupiers were still rationalising space in Q4 2021. Judging by the 10,000 sq m contraction in island-wide net absorption - albeit moderating from 2020 - some occupiers shrank office footprint at a pace that outstripped expansion and new take-ups.

But with supply tight and demand expected to hold up, it seems that office landlords with Grade A office buildings are well-positioned for the next few years.