Forecasts for CBD office rents clipped

After tepid Q1 growth, property consultants expect rents to stagnate or ease for the rest of 2015; next year could bring downward pressure

Sentiment in the Singapore office market, hailed as the bright spot of the local property market for the most part of last year, has taken a hit.

Weaker-than-anticipated leasing demand for office space in the Central Business District (CBD) since late last year was mirrored in weak rental growth in the first quarter; with no significant pick-up in demand expected in the near term amid tepid economic growth and some foreign banks tipped to shed office space, several property consultants are clipping their forecasts for CBD Grade A office rent growth this year.

The trend is being exacerbated by a diversion of CBD office demand to suburban business parks by qualifying users, and a step-up in office completions from next year.

Last November, CBRE had predicted a 10 to 15 per cent increase in full-year 2015 average gross effective monthly rental value for its Grade A (CBD Core) office basket to between S$12.32 and S$12.88 per square foot (psf). Following a 1.8 per cent quarter-on-quarter rise in the rental level to S$11.40 psf in the first three months of this year, CBRE now expects the figure to stay flat for the rest of this year.

Savills Singapore’s overall CBD Grade A basket reflects a marginal 0.4 per cent quarter-on-quarter increase in the average rental value to S$9.92 psf in the first quarter. Last year, the group had predicted that rents may rise to S$11.16 psf by end-2015 from S$9.88 psf in Q4 2014; but it is now revising its forecast to a full-year decline of around 3 per cent to S$9.60 psf.

Figures from another major property consulting group show that the average monthly rental value for prime Grade A CBD offices managed to inch up less than half per cent quarter-on-quarter to just over S$12 psf in Q1 this year.

A few bright sparks for office demand may come from industries in a growth phase, such as trading houses and construction and engineering firms.

Besides the wave of new office completions to kick in from next year, market watchers are also tracking secondary space and shadow space. Secondary space is space vacated on the expiry of a lease by a tenant which is moving to another building, as well as space returned to a landlord when a tenant reduces its leased area upon a lease renewal. Shadow space is that excess space that a tenant with an ongoing lease is looking to dispose of by finding sub-tenants or replacement tenants.

Savills estimates that a total of 796,000 sq ft of secondary and shadow space in its basket of CBD Grade A buildings will be released this year and the next. This, combined with an estimated 1.18 million sq ft vacant stock in existing CBD Grade A office buildings and some 3.4 million sq ft of uncommitted space in projects in the pipeline – including that in Guoco Tower, Duo Tower, V on Shenton and Marina One – will result in around 5.37 million sq ft CBD Grade A office supply for leasing between Q2 2015 and end-2017, said Savills.

This supply quantum is more than the 3.2 million sq ft that could be absorbed over a three-year period based on the historical average annual net take-up of CBD Grade A offices from 2005 to 2014.

CBRE’s Mr Armstrong said the issue is a bunching of office project completions around the same time in late-2016. “Once the wave of completion passes, there is very limited new construction that will offer larger tenants opportunity for 2018 and beyond.”

He predicts that within the next six to 12 months, two or three large occupiers will take advantage of soft market conditions to secure anchor tenant leases on favourable terms. “In past cycles, this tends to act as a good sign that confidence is being restored and with it, the likelihood of a return to growth may be at hand.”

Source: Business TImes

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