Net office demand contracts in Q3, vacancy crosses 10%.
The amount of occupied office space islandwide contracted 5,000 square metres (sq m) in the third quarter of this year, contrasting with an increase of 30,000 sq m in Q2 this year, according to official statistics. This takes the net increase in office demand in the first nine months to 26,000 sq m - lower than the 72,000 sq m in the year-ago period, based on Urban Redevelopment Authority's data released on Friday.
Market watchers attribute the weaker demand to the sluggish economy and anaemic employment numbers.
The negative office demand in Q3 2016 coupled with a pick-up in office completions sent the islandwide office vacancy rate north - from 9.1 per cent at end-June 2016 to 10.4 per cent at end-September - the highest vacancy in four years since the eurozone crisis erupted in Q2 2012, shows Urban Redevelopment Authority data.
The stock of office space in Singapore rose by 101,000 sq m in Q3 after climbing 27,000 sq m in Q2. Major completions in the third quarter included Guoco Tower in Tanjong Pagar, Crown at Robinson and Havelock II as well as the Land Transport Authority's additions and alterations and conversion of an existing building in Chai Chee to offices.
URA's office rental index, which tracks the entire Central Region, eased 1.1 per cent quarter on quarter (q-o-q) in Q3, a smaller pace of drop than the 3.5 per cent decrease in Q2. The Q3 index is down 6.6 per cent from Q4 last year and also 13.2 per cent lower than the recent peak in Q1 2015.
The decline for the whole of this year could be around 7 per cent to 9 per cent, followed by a further contraction of 7 to 10 per cent next year, as the office market could be hit by the double whammy of high volume of new completions in 2017 - Marina One, Duo and the new UIC Building - and persistently weak economic growth.
The average gross monthly rental for investment-grade CBD office space retreated 1.9 per cent q-o-q to reach S$8.63 per square foot at end-Q3 2016, a milder contraction than the 2.9 per cent q-o-q drop in Q2 this year. From the recent peak in Q1 2015, rents have corrected 18.3 per cent.
However, investment-grade CBD rents appear to be reaching support level as evidenced by the gaining of traction of leasing activity for newly completed and soon-to-be-completed projects.
A key feature of the current office leasing activity is that it is emanating mostly from tenants relocating to new developments or renewing their leases at existing premises - generally with little or no expansion in their physical footprint.
In some cases, tenants take less space when they move to newer buildings which offer bigger floor-plates and greater space efficiency. New entrants coming to Singapore to set up shop these days are rare, lamented a seasoned leasing agent.
Given this situation, the next wave of rental decline is likely to hit the older and lower-grade offices in the CBD and the fringe, when occupiers who have committed to space in the new projects in the CBD vacate their existing premises.
Cognisant of this trend, landlords of non-Grade A buildings are now more open to negotiations - with longer rent holidays and rent-free fitout periods in order to retain and attract new demand to backfill the space freed by outgoing tenants.
Looking further ahead, after declining in 2017, CBD Grade A rents will stabilise in 2018 because of a dearth of new supply completions; but rents are not expected to stage a strong recovery thereafter because there's likely to be another wave of office supply completing from 2019 to 2021 - including the project on the Central Boulevard site being tendered in November, as well as redevelopment projects such as CPF Building and Golden Shoe Car Park.
In the meantime, islandwide office vacancies are expected to continue creeping upwards. The figure could hit 12 to 13 per cent by the end of next year. The last time vacancy reached 13 per cent was in Q3 2010.
URA's office price index fell 0.4 per cent q-o-q in Q3 2016 - a smaller decline compared with the 1.5 per cent drop in Q2.
Adapted from: The Business Times, 29 October 2016