The Urban Redevelopment Authority (URA) has released data showing that office rents in Singapore's central region continued to rise in the first quarter of 2023. This increase of 5.1% compared to the previous quarter (Q4 2022) is consistent with the growth observed from Q3 2022 to Q4 2022.
Despite the overall resilience in the office rental market, analysts have noted a moderation in demand for prime office spaces in the Downtown Core and Orchard areas. The reduced pipeline supply is believed to have contributed to the ongoing upward trend in office rents in the central region.
According to Lam Chern Woon, the head of research and consulting at Edmund Tie, office rents in the central area saw a 3.9% increase in Q1. This growth rate is lower compared to the previous quarter, which experienced a 6.6% rise.
Tricia Song, CBRE's head of research for South-east Asia, suggested that the slower rental growth in prime Central Business District (CBD) office space could be attributed to weaker sentiment caused by recent tech layoffs and the subsequent significant increase in shadow space. "Shadow space" refers to surplus space on an existing lease that a tenant wishes to give up by finding a replacement tenant for the landlord.
Song pointed out that median rentals for prime CBD space experienced a slight increase of 0.2% in Q1 2023, reaching S$10.77 per square foot per month. This growth rate was lower than the 0.8% increase observed in Q4 of 2022. Additionally, vacancy rates for prime buildings rose from 9.5% in Q4 2022 to 10.9% in Q1 2023.
On the other hand, in the fringe area, rents saw a significant rise of 8.8%, which marked a reversal from the 4% decline in Q4 of the previous year, as mentioned by Lam.
According to Wong Xian Yang, the research head at Cushman & Wakefield, some cost-conscious tenants are opting for lower-cost options outside the CBD due to an uncertain economic outlook and tightened financing conditions. This trend could be the reason for the increase in office rents in the fringe area.
In Q1 2023, office space prices in the central region remained flat compared to the 3.7% increase observed in the previous quarter.
During the same period, notable strata office deals included the sale of five full strata floors at the 20-story freehold office project Solitaire on Cecil. These floors were reportedly sold to high-net-worth individuals and family offices for S$162.8 million, or S$4,300 per square foot (psf) on a blended basis. The 20th floor, in particular, set a record unit price of S$4,325 psf for a full floor space in a strata-titled office building in Singapore, according to JLL head of research and consultancy Tay Huey Ying.
At the end of Q1 2023, the total supply of office space in the pipeline across the island amounted to about 837,000 square meters (sq m) in gross floor area (GFA), representing a 4% decrease from the 872,000 sq m at the end of the previous quarter.
Net demand, measured by the amount of occupied office space, increased by 21,000 sq m in Q1, surpassing the 9,000 sq m increase in the previous quarter. The stock of office space also grew by 14,000 sq m in Q1, rebounding from a contraction of 23,000 sq m in the previous quarter. The islandwide vacancy rate of office space declined slightly to 11.2% as of the end of March, compared to 11.3% at the end of December.
Leonard Tay, head of research at Knight Frank Singapore, noted that quality office space remained in demand as businesses continued to relocate their headquarters to Singapore, and domestic office users moved from aging office buildings upon lease expiry.
Looking ahead, analysts expect modest office rental growth due to tight supply and firms pursuing rightsizing while maintaining a cautious business sentiment. JLL's Tay added that while leasing activity for recently or soon-to-be-completed projects is expected to maintain good traction, backfilling of spaces vacated by relocating occupiers could take longer due to the subdued sentiment.
Although the volume of shadow space available has not yet impacted rents, CBRE's Song mentioned that if it becomes more widespread, landlords with greater exposure may need to consider more competitive commercial terms to compete with the availability of such spaces.
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