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.
But it is not all doom and gloom, as downward pressure on office rents presents good opportunities for tenants to lock in leases at attractive rents. A few big leasing transactions expected later this year or next year could quickly uplift sentiment, say market watchers.
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.
Its executive director for office leasing Moray Armstrong said: "Office demand in the CBD has been disappointing in Q1. That said, we have observed strong leasing interest in decentralised and fringe locations."
He also noted that the CBD office market may be entering a new phase after a rental rise of nearly 20 per cent over the past 18 months: "I think that overall leasing activity looks set to remain sluggish through the next couple of quarters. That said, we don't foresee any significant impact on the market in the short term as occupancy levels will remain high. Rents are expected to face some pressure next year, off the back of the high level of supply expected in H2 2016."
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.
Its research head Alan Cheong said: "What is creating a spanner in the works for CBD office space demand is that the void left by banks is not being filled by tech companies, which are being drawn to business parks. The partial substitution effect by business parks has diverted a vast growth driver for office demand from tech companies and upset the eco-system governing Grade A office dynamics."
He said that, beyond lower rents, tech companies seem to favour suburban business parks for their campus-like environments, which are conducive for the flow of creative juices and for collaboration. "As a result, the demand curve for office space could be shifting down," he suggested.
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.
However, the company now expects the rental level to slip to around S$11.90 psf by year-end; this translates to a full-year drop of around 1.6 per cent. The group's latest rental forecast for Q4 2015 is significantly below the S$13.30 psf it had predicted last November. A further drop is expected next year.
Mr Armstrong blamed disappointing Q1 CBD office demand to moderating economic growth, resulting in a greater air of caution, and occupiers in the financial industry not being in expansion mode. "Sectors such as e-commerce, insurance, pharmaceuticals ... are doing well, but the absence of (new demand from) banks remains the principal headwind for CBD office demand."
Marcus Loo, executive director for commercial at Savills Singapore, said: "The global economy is still trudging along. Banks and other occupiers we are speaking to are looking to give up space in the next 12 to 18 months. Tenants who do not need to be in the CBD will decentralise, potentially leaving a vacuum in the Core CBD. The problem will be exacerbated as new completions start to kick in from next year. Our CBD office market may be heading towards a perfect storm in favour of tenants - unless there is a turnaround in the global economy in the foreseeable future."
However, he cited a few bright sparks for office demand 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, 7 May 2015