Office leasing market demand continues to be driven by certain sectors

Office leasing market demand continues to be driven by the flexible workspace and technology sectors

• CBD Grade A rents accelerated its decline to 2.3% QOQ in Q3 2020 to reach S$9.77 psf, versus 1.2% QOQ in Q2 2020. A further rental correction expected in Q4 2020
• CBD Grade A vacancy rate increased 0.3pp to 4,9% as certain sectors hit hard by the pandemic had to return or reduce leased space
• New office leasing market demand in Q3 was mainly driven by flexible workspace operators; tech giants making Singapore their regional hub bode well for sentiment
• 142,000 sq ft of flexible workspace to open the next coming three months
• Total office or mixed developments’ investment volumes declined by 35.8% QOQ to S$846 million in Q3; the transaction of Robinson Point recorded the highest price on a psf basis for an office building since the Straits Trading Building was sold in 2016
• Unchanged long-term capital value growth QOQ at 2% p.a. versus long-term rental growth of 3.3%

Colliers International, on October 7th published its latest research report which examines the office leasing market demand, the performance of the Singapore office property market in Q3 2020 and its prospects ahead.

Rents affected as office leasing market demand weakens

Evaluating the data, Colliers Research notes that CBD Grade A gross effective rents continued to moderate further by 2.3% quarter-on-quarter (QOQ) to S$9.77 per square foot (psf) in Q3 2020, while Grade B rents slid 2.4% QOQ.

Tricia Song, Head of Research for Singapore at Colliers International, said, “With the year-to-date (YTD) decline of 3.4% in CBD Grade A office rents, we expect to see further downside in Q4 2020.”

“Meanwhile, landlords continue to offer higher incentives, as leasing demand weakens further with the global economic slowdown. For example, rent-free periods for CBD Grade A offices have increased from 1.3 months to 1.5 months.”

Rick Thomas, Head of Occupier Services in Singapore at Colliers International, said, “With the recent government relaxation of work from home restrictions, occupiers who have already started strategising and rationalising their real estate portfolio will now act. Landlords are more willing to negotiate, while occupiers are in search of greater value.”

“We are optimistic and expect increasing activity in the office leasing market over the next few months.”

Office rents and vacancy, Q3 2020

Source: Colliers International
Note: Average gross effective rents are benchmarked to a full-floor space in mid-zone level; conservative figure tending towards lower-end of rental range for a property. Effective rent refers to average rate payable over the lease term after accounting for incentives.
* On a like-for-like basis

“Vacancy and take-up

As expected, CBD Grade A vacancy expanded to 4.9% in Q3 2020 from 4.6% the previous quarter, as incremental new take-ups in recently completed buildings were negligible. Meanwhile, vacancies edged up in all micro-markets except Raffles Place/New Downtown’s premium buildings.

Demand driver in Q3 2020 continues to come from flexible workspace which had been previously committed.

WeWork and JustCo will open their branches at 30 Raffles Place (82,000 sq ft) and Centrepoint (60,000 sq ft) respectively in Q4 2020. The Great Room will also occupy 37,000 sq feet of space at the new 70% pre-committed Afro-Asia i-Mark building after its completion in Q4 2020, while The Executive Centre plans to move and expand into the two highest floors in One Raffles Quay North Tower in 2021.

Colliers also sees some tech giants planning to either expand their footprint or establish their presence in Singapore. ByteDance is reportedly planning to invest billions of dollars and recruit hundreds in Singapore as part of its global expansion. At the same time, Tencent intends to open a new office in Singapore that will be its regional hub for Southeast Asia.

Other tech companies such as Twitter and Rackspace also plan to expand their headcount in Singapore.

Mr Thomas added: “We see the flexible workspace sector being more and more sophisticated offering a more unique and bespoke service to a targeted audience, While some of the tech giants have a small presence in Singapore now, we can expect them to bloom in the years to come and improve the tech sector representation of the overall occupiers in Singapore.”

Investment Sales

Singapore remains attractive to investors despite a 35.8% QOQ decline in the total office or mixed office investment volumes to S$846 million in Q3 2020, which brings the rolling 12-month volume to S$4.0 billion, a 34.5% decline QOQ.