Grade-A office rents to moderate as occupiers turn cautious
The rental market for office property in Singapore saw a sharp 4.9% jump in the index in 3Q2023, a figure which was double the 2.3% q-o-q growth in the preceding quarter. According to JLL Head of Research and Consultancy Singapore, Tay Huey Ying, “We believe this is largely attributable to leasing deals concluded several quarters back when occupier demand was robust, underpinned by the explosive growth of the technology sector.”
URA’s real estate statistics showed that in 3Q2023, median rents for Category 1 office space, which includes modern buildings in the Core Business District such as the Downtown Core and Orchard Planning Area, dropped 2.3% q-o-q – the first time in five quarters that median rents experienced a decrease. Moreover, median rents for Category 2 office space, all other office areas outside of Category 1, fell 4.5% q-o-q too – the first time in eight quarters.
JLL concurred with this, recording that CBD Grade-A office rents declined in 3Q2023, ending nine quarters of consecutive growth. In particular, their tracked basket of CBD Grade-A office spaces experienced an 0.3% q-o-q dip in the average gross effective rent, bringing it down to $11.29 psf pm from $11.32 psf pm in 2Q2023. According to Tay, this rent correction spurred forward as tenants took advantage of the soft leasing market to seek more favourable rental terms.
In an attempt to bolster occupancy, landlords have taken measures like sub-dividing larger spaces into leasable units and providing ready-fitted units while readjusting their rental expectations to meet the market. Meanwhile, net demand for office space in the Downtown Core reached 398,264 sq ft in 3Q2023, representing the strongest q-o-q growth since 1Q2020, as Wong Xian Yang, Cushman & Wakefield Head of Research for Singapore and Southeast Asia reported.
On the other hand, net demand in the rest of Central area was -161,459 sq ft in 3Q2023 – a figure which could be reflective of the flight to quality, with many Grade-A offices located within the Downtown Core. Additionally, financial and professional services remained the strongest demand drivers of office space in the CBD, making up 58% of new leases in the first nine months of 2023, up from only 26% for the whole of 2022.
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Private wealth, asset management, consumer goods, and tech companies looking to expand their presence in Singapore also contributed to the uptick in demand. These more diversified demand drivers have made up for the slack resulting from a slowdown in the tech sectors, and the subsequent stock removals from project redevelopments have also helped to prop up occupancies to 90%, according to Tricia Song, CBRE Head of Research for Singapore and Southeast Asia.
In 2024, close to 1.9 million sq ft of Grade-A office space is slated for completion in the CBD alone, primarily from two projects – IOI Central Boulevard Towers and Keppel South Central – and as of 3Q2023, JLL estimates that close to 1.1 million sq ft of this remained uncommitted.
Tay believes that the sheer amount of office space entering the market next year is likely to put downward pressure on rents in the following quarters. Moreover, with a high interest rate regime and economic uncertainties in the global economy, Cushman & Wakefield’s Wong expects rental growth in the Central area to be moderate for subsequent quarters.
According to JLL’s forecasts, Grade-A office rents in the Core CBD are projected to grow by 1.5% to 2% for the entire year – a figure which is slower than the 8.3% rental growth in 2022. In the same vein, CBRE Research added that overall transaction volume remained subdued in 3Q2023 owing to high interest rates, with just 57 office strata transactions in the Central Region.