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Office market rental hike faces resistance as tenants seek ‘flight to value’

by • October 11, 2019 • office, Research and AnalysisComments (0)317

Office market rental hike to face resistance as flexible workspace sector continue to drive space take-up in Q3 2019

  • Office market rental hike faces resistance as CBD Grade A office rents grew at a slower pace, rising 1.5% in Q3 from Q2 2019
  • ‘Flight to value’ observed as tenants resist office market rental hike
  • Flexible workspace sector continued to drive space takeup in Q3 2019
  • Rental growth expected to slow amid weaker economic outlook; shadow space could potentially emerge

Colliers International today published its latest research report which tracks the performance of the office property market in Singapore in Q3 2019 and its outlook ahead.

Office market rental hike

Office market rental hike faces resistance (Image credit: Colliers International)

Office market rental hike faces resistance

Colliers Research noted that there are signs that tenants are resisting further hikes in rents following nine consecutive quarters of increase in Grade A office rents in the central business district (CBD). Cumulatively, CBD Grade A office rent has risen by 27% since Q2 2017, driven in part by tightening supply.

Given the weaker economic outlook, Colliers Research expects occupiers to exercise more caution with regards to their space needs and real estate cost. This could potentially curtail any further sharp increases in office rents in the coming quarters.

Tricia Song, Head of Research for Singapore, Colliers International, said, “We are starting to see ‘flight to value’ in the market where some tenants eschewed higher lease renewal rate and opted to relocate to another building with a lower rent. Whether this trend would become more widespread will depend on market dynamics and the state of the economy. Broadly, we expect rental growth to continue to slow in line with a slower economic growth. Some trade sectors may have already felt some pressure. We may see some shadow space emerge from large occupiers, such as financial institutions.”

Rents
Based on data tracked by Colliers Research, average Grade A office rents in the CBD rose by 1.5% quarter-on-quarter (QOQ) to SGD10.08 per square foot per month (psf pm) in Q3 2019, slower than the 3.0% increase achieved in the previous quarter. On a year-on-year (YOY) basis, average CBD Grade A office rents in Singapore grew by 9.6% in Q3 2019.

In Q3 2019, Grade A office rental growth was the strongest in the Shenton Way/ Tanjong Pagar and Raffles Place/New Downtown Premium micro-markets, driven by tight vacancies and new builds. Meanwhile, office rents at Raffles Place/New Downtown Grade A micro-market – which comprises of older buildings – were flat QOQ, narrowing the gap between rents for this sub-segment and that of Shenton Way.

For the full year 2019, Colliers Research projects that overall CBD Grade A office rents should grow by 8%, moderating from the strong 15% rise in 2018. It forecasts rents to continue to growth at a slower pace of 5% in 2020.

“We expect new CBD Grade A supply to remain limited in 2019-2021, averaging 678,000 sq feet (63,000 sq metres) p.a. This should keep CBD Grade A vacancy tight, below the 10-year average of 6.3%. We expect CBD Grade A office rents to grow 8% in 2019 and 5% in 2020, moderating from a strong 15% in 2018.”

Demand, supply and vacancies
The flexible workspace sector continues to drive takeup with WeWork reportedly due to lease the entire building at 21 Collyer Quay (formerly HSBC Building) in Q2 2021 after HSBC moves out. Meanwhile, East Japan Railway Company (JR East) opened a coworking space at Twenty Anson taking 13,000 sq feet (1,200 sq metres).

“In 2019, we expect CBD Grade A net absorption to be driven mainly by expansion in the technology and flexible workspace sectors. In 2020, we expect demand to be more broad-based.”

Rick Thomas, Head of Occupier Services in Singapore, Colliers International, said, “The flexible workspace sector remains a key driver of demand for office space and it now accounts for about 5% of CBD Grade A space in Singapore. We are positive on the sector’s prospects as it provides more flexibility to occupiers and offers an alternative real estate solution amid rising uncertainty in the business environment. While we believe the flexible workspace sector will continue to grow, the tight availability of space may limit its growth to some extent.”

Colliers Research observed that the supply of new CBD Grade A office space will remain limited in 2019-2021, averaging 678,000 sq feet (63,000 sq metres) per annum. This should keep CBD Grade A vacancy tight, below the 10-year average of 6.3%. The next major supply hike (about 7% of stock) is due to come onstream in 2022.

” In 2020, we forecast a slower rental growth of 5%, in line with slower economic growth.”

Investment market
In Q3 2019, transactions remained robust and rose 11.9% QOQ even with a strong Q2 2019. The transaction volume of SGD2.91 billion in the quarter brought rolling 12-month volumes of office and mixed-use commercial transactions to SGD8.71 billion (+23% QOQ).

The notable transactions in the quarter included: DUO Tower and DUO Galleria; 71 Robinson Road; and Anson House. Colliers Research noted that the unveiling of development plans for Greater Southern Waterfront – during the National Day Rally on 18 August – likely boosted investor sentiment in the Shenton Way/Tanjong Pagar micro-market where 71 Robinson Road and Anson House are located.

With optimistic valuations achieved in major transactions in Q3 2019, the average imputed capital value of CBD Grade A office properties rose 0.7% QOQ to SGD2,512 psf. Meanwhile, the cap rates remained unchanged in the quarter at between 3.15% and 3.5% on average.

“We expect yields to compress in 2019 on a favorable interest rate outlook and the large capital allocation to Singapore. We recommend occupiers, particularly those requiring large contiguous space, to review and explore lease options early.”

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