THE pendulum is swinging in favour of office landlords in the third quarter, with rents and capital values continuing to climb, said consultancy Colliers International yesterday.
It noted that most areas - called micro-markets - are experiencing a worsening supply squeeze that has generated occupancy rates of 95 per cent and kept rents rising for 18 months.
"The tight market has given landlords greater pricing power over tenants and we are seeing a growing divide between the type of spaces tenants desire in relation to affordability and landlords' rental expectations," said Mr Marcus Loo, the firm's executive director of office services.
Raffles Place and New Downtown are the market's red-hot zones.
Monthly rent for premium-grade offices shot up 6.1 per cent from the second quarter to the third to $11.67 per sq ft (psf) a month, the highest quarterly growth in three years, while Grade A office rents rose 2.9 per cent to $10.25 psf.
Rents for Grade A offices in other areas of the Central Business District (CBD) have expanded between 0.4 per cent and 2.9 per cent quarter on quarter and are heading for the "psychological rental benchmark level" of $10 psf a month, said Colliers.
Overall, the average occupancy rate for completed premium-grade and Grade A offices in the CBD has held firm during this quarter, at 96.5 per cent - the highest in six years.
The average occupancy rate is 97.2 per cent in Orchard Road, 97.8 per cent in the city fringe and 98.8 per cent in the suburbs.
While there were fewer transactions of strata-titled office units due to the Hungry Ghost Festival, the market for sales en bloc has been "bustling with activity" in this quarter.
Anson House in Tanjong Pagar sold for $172 million, Straits Trading Building in Battery Road reportedly went for $450 million and three levels of GB Building in Cecil Street sold for about $31.7 million in total.
The prices at these sales pushed up capital values, which are up 2.2 per cent for premium-grade offices and by 1.9 per cent for Grade A ones in the Raffles Place and New Downtown.
Ms Chia Siew Chuin, director of research and advisory at Colliers International, said rents of premium-grade office space in this zone are expected to grow close to 15 per cent for the full year, with rents in overall CBD grades A and B office space growing up to 10 per cent. She said capital values for premium and Grade A offices in Raffles Place and New Downtown will grow about 5 per cent this year.
The report also noted that more tenants have been asking for longer lease terms of, say, five years, with an option to extend for another five, or six-plus-six- year terms, with built-in rental review terms.
"(This) provides tenants with more stability and allows them to spread their asset depreciation for the longer period of time...
"However, longer lease terms do not generally equate to lower rents. Landlords may factor in potential rental upside if they are tied to a longer period of time," said Mr Loo.
Source: Straits Times, 23 Sep 2014