Published December 11, 2009

Office rents may end long slide to basement

Bottom in sight in 2010, observers say; leasing activity is gathering steam


(SINGAPORE) The Singapore office market has seen its prospects improve dramatically since a gloomy start this year.

While office rents are still expected to dip further next year, although at a much slower pace than over the past 15 months, an unexpected flurry of leasing activity recently has led some to predict a bottoming-out of office rents as early as mid-2010.

'We are currently witnessing a strong recovery in leasing activity. Some tenants are even starting to look at expansion,' says CB Richard Ellis executive director (office services) Moray Armstrong.

Property consultants are predicting a return to positive office demand to the tune of more than one million sq ft next year on the back of economic growth. But with over 2.7 million sq ft of new space slated for completion in 2010, vacancies will continue to rise and rents dip, albeit at a slower clip than in 2009.

Older buildings suffering a flight of tenants to new projects still face a challenging year ahead. Still, some expect the authorities to keep a close watch on the Republic's competitiveness in office rents. Mr Armstrong suggests 'it is not unrealistic to foresee that the government may release a couple of prime office sites in the Marina Bay area in the second half next year'.

'A lot will hinge on how the office market performs in the next three months. The government wants to ensure the supply pipeline is healthy so that businesses feel confident about Singapore's ability to meet long-term demand for growth from headquarters and corporates.'

Jones Lang LaSalle's regional director and head of markets Chris Archibold acknowledges 'some talk in the market that office supply may become limited in 2013 and 2014 in the CBD Core'. 'The Singapore government is likely to continue monitoring the office market and inject supply into the market through the reserve list in anticipation of an upturn to avoid the supply crunch we saw in 2007,' he added.

CBRE data shows gross average monthly rental value for Grade A office space has slipped 7.95 per cent quarter on quarter to $8.10 per square foot in Q4 this year. This is the smallest q-on-q drop since office rents began falling in Q4 last year. The latest Q4 2009 figure reflects declines of 46 per cent for the whole of 2009 and 57 per cent from the peak of $18.80 psf in Q2/Q3 last year. CBRE is projecting a further contraction of 13.6 per cent next year to reach $7 psf by end-2010.

Colliers International's average grade A rental data for various CBD micromarkets show q-on-q dips of 1.9 per cent in Raffles Place/New Downtown and one per cent in Bugis/ Beach Road in Q4 2009, with rents unchanged in Shenton Way/Tanjong Pagar, City Hall/Marina Centre and Orchard Road. For the whole of 2009, the falls ranged from 42 to 53 per cent, but Colliers predicts rental declines will moderate to 'within 5 per cent' in the first six months of next year from current levels.

DTZ projects a 15-20 per cent drop in average monthly rental value for prime office space in Raffles Place next year, which it says has halved this year to $7.90 psf from $16 psf in Q4 2008.

Mr Armstrong sees rentals stabilising around mid-2010 particularly for better-quality buildings. DTZ's SE Asia head of occupational and development markets Angela Tan says rents will likely bottom in 2011. 'If the economy grows more strongly than expected, rents could bottom earlier in end-2010.'

The completion of new projects is creating a two-tier market. Says JLL's Mr Archibold: 'Given the pick-up in leasing activity, we expect the bottom in rentals for new prime Grade A office buildings to be as close as H2 2010. However, there's likely to be longer downward pressure on rentals in existing prime Grade A office buildings as landlords seek to backfill vacancy caused by tenants relocating to new developments.'

Mr Archibold points to a 'flight to quality' by occupiers with leases expiring in older buildings to newer, higher-quality buildings, riding on lower rents and the larger contiguous spaces that could enable them to consolidate operations into a single location.

On a brighter note, CBRE's Mr Armstrong says he has started seeing some of the resurgence in leasing activity being driven by expansion and not just replacement needs. This is laying the foundation for decent positive take-up.

Analysts expect positive demand to continue this quarter following the modest turnaround in Q3. However, with some 570,000 sq ft of negative demand in H1 2009, the year will still end in negative territory. Colliers' executive director (commercial) Calvin Yeo forecasts positive demand of 1.55 million sq ft in 2010; CBRE predicts positive take-up of about one million sq ft next year and 2 million sq ft in 2011.

Meanwhile, shadow office space - surplus stock put up for subletting - has fallen to about 256,000 sq ft from 583,000 sq ft at its peak in June 2009, says Mr Yeo. 'We expect shadow space to dissipate by H2 2010 as the economy recovers.'

Colliers estimates islandwide office vacancy rose from 12.2 per cent as at end-Q3 2009 to 12.8 per cent as at end-2009. On a full-year basis, this is a 4 percentage point rise. Mr Yeo expects the figure to inch up 1.1 points to 13.9 per cent by end-2010.