CBD office rents dip again in Q1 amid additional space

20130404-st-cbd-q1-office-rent-dips-pic However, rents in the city fringe and suburban markets are stable

[SINGAPORE] THE office leasing market in the Central Business District (CBD) slowed slightly in the first quarter of this year, data from Colliers International showed.

Average gross monthly rents for both Premium and Grade A office spaces dipped 0.7 per cent from the previous quarter to $8.41 psf.

Colliers attributed the decline across the various CBD micro-markets to increased competition from new and upcoming offices in the area and growing vacancy pressures from secondary stock that will be relinquished in the next five years.

The fall in office rents continues a trend among various CBD office spaces, such as in the Raffles Place/New Downtown, Shenton Way/Tanjong Pagar, City Hall/Marina and Orchard Road micro-markets, where rents have been sliding quarter-on-quarter over the past four to six quarters.

In contrast, office rents in the city fringe and suburban micro-markets were stable at $7.60 psf and $4.53 psf, respectively. Colliers said this could be the result of companies exploring more cost-efficient locations as well as the improvement of new office buildings in these areas, which has boosted demand.

Colliers noted that tenants seemed to be moving from Grade A office spaces to Premium ones. Occupancy for Grade A space in the CBD fell to 93.3 per cent in Q1 from 94.5 per cent in Q4 2012, even as occupancy for Premium space increased from 88.5 per cent to 90.2 per cent over the same period.

Marcus Loo, executive director of office services at Colliers, explained: "Rents of Premium Grade office space continue to face downward pressure and have provided an opportunity for tenants to upgrade to newer premises with better specifications." He added that companies also sought more efficient floor plate layouts.

Colliers also found that office capital values remained strong. It observed encouraging activity in the sales market, such as the sale of most of SBF Centre's office units in February, and the en bloc sales of 16 Collyer Quay and 2HR on Havelock Road.

It said this was supported by the low interest rate, property cooling in the residential and industrial sectors, and continued interest from end-users.

Owing to such strong demand, capital values of both Grade A and Premium office spaces in Raffles Place/New Downtown held firm at $2,390 psf and $2,640 psf, respectively in Q1.

Colliers's outlook for the next five years suggests little change, with rents expected to continue sinking and capital values staying positive.

It cited continued supply pressures on the primary and secondary markets - the potential supply of office space in Singapore until 2017 is 9.3 million sq ft, with 6.4 million sq ft in the CBD alone. With tenants moving from older office spaces to new ones, Colliers noted the possibility of slow absorption of secondary space that has been or will be returned in that period.

However, Chia Siew Chuin, director of research and advisory at Colliers, expects the decline in rents to stay below 5 per cent.

She said that factors such as banks' expansion in Singapore, the introduction of four new Qualifying Foreign Law Practices, and the upturn of Singapore's economy and its continued status as a regional hub could push up rental demand and offset price declines.

Ms Chia also drew attention to an increase in Requests for Proposals in Q1, especially from the financial services, pharmaceutical and IT industries, which she said could result in tenants inking more office leasing deals in the next six to 12 months.

The forecast for the sales market is positive. Despite compressing yields, Colliers International expects sales to be shored up by income growth and limited investment options.

Ms Chia said office capital values could potentially grow 3 to 5 per cent this year due to strong investment interest.

"Singapore remains on the radar of investors for future growth due to her renowned status as a safe investment haven," she said.

Source: Business Times, 4 Apr 2013