Office rents to recover due to demand to be fueled in 2021 by Chinese Technology and Non-Bank Financial Services Firms
According to CBRE Research, office rents are expected to improve in the second half of 2021, resulting in an overall positive rental growth for the whole of 2021.
This is on the back of Ministry of Trade and Industry’s projection that the Singapore economy will grow by 4% to 6% in 2021. Nonetheless, office demand is expected to remain relatively subdued in 1H 2021, as firms will still remain cautious in the wake of the COVID-19 pandemic. Should economic activity and business sentiment recover after the administration of the vaccine by Q3 2021, the office market is well poised to benefit from the gains in employment.
Five new projects are estimated to complete in 2021, which will add another 1.23 million square feet to the entire office stock. Out of these five, there is only one Grade A office development – CapitaSpring, which will add another 0.65 million square feet of office stock to the Grade A (Core CBD) market.
Mr Desmond Sim, Head of Research, Singapore and Southeast Asia, CBRE, says, “Leasing activity is improving, as we understand that there are currently more ongoing negotiations for CapitaSpring which is slated to complete next year. The initial office supply pressure for 2022 has been dissipated due to construction delays, but which augured well for the office market as it provided more time for pre-leasing activities. The future supply that will spread over a longer time horizon allows demand and supply dynamics to recalibrate.”
Although there is a limited supply of new Grade A developments in the pipeline, CBRE Research expects that Grade A (Core CBD) occupancy will face further downward pressure in the early stages of 2021.
Chinese technology and non-bank financial services firms to fuel demand in 2021
Given Singapore’s political-neutral position and its introduction of new initiatives in terms of policy and tax structures, more Chinese technology firms are displaying strong appetite for expansion within the city.
Office demand in 2021 will also be fueled by non-bank financial services firms such as investment managers and hedge funds. To enforce Singapore’s position as a hub for investment funds, the Monetary Authority of Singapore launched the Variable Capital Companies framework in January 2020.
Grade B market to remain resilient
Some developers have leveraged the CBD Incentive Scheme that was introduced in 2019 by the Urban Redevelopment Authority to rejuvenate their older office stock, which include AXA Tower and Fuji Xerox Towers.
As these buildings are slated to undergo redevelopment, the Grade B office market will witness more occupier movement due to the displacement of occupiers in these buildings. This will lend support to occupancy in the Grade B office market.
Office market performance in 2020
Since the start of 2020, business sentiment was relatively lacklustre and firms across an array of industries were tightening their belts. This prompted many firms to downsize as a form of cost management practice.
Leasing activity in 2020 was primarily driven by renewals and relocations, with a reduction in overall footprint. In the first three quarters of 2020, this amounted to a cumulative negative net absorption of -545,000 square feet.
Preliminary estimates for Q4 2020 indicators seem to suggest that the reduction in occupied space has slowed substantially. In the absence of no new completions in Q4 2020, the islandwide office market registered a net absorption of -14,800 square feet.
For the full year of 2020, overall net absorption amounted to -560,000 square feet, which was well below the 10-year historical annual average net absorption of 1.63 million square feet. Despite having 1.18 million square feet of new completions in 2020, pre-leasing activity in the new-builds were slow and were further impacted by the COVID-19 outbreak.
Based on preliminary leasing data, 2020 year-to-date leasing volume was approximately 1.18 million square feet.
Mr David McKellar, Co-head of Office Services at CBRE, says, “Firms in the technology and financial services sectors were the top two demand drivers and contributed to more than half of the leasing volume in 2020.”
Some noteworthy deals in 2020 included:
• Citibank’s disposal of three floors in Asia Square Tower 1, which was eventually taken up by a U.S. tech giant.
• Prudential Assurance’s move to UE BizHub West
Mr McKellar continues, “While the cutback in large occupiers’ footprint has resulted in an increase in secondary space, this also presented more quality, fitted-out options for other tenants. We also observed that given the heightened uncertainties in the market, incoming tenants are open to taking over fitted premises as it reduces the need for additional capital expenditure.”
Hybrid office arrangement: the flexible space option
The COVID-19 pandemic has expedited the adoption of digitalisation and telecommuting. Employers also re-looked at possible alternative working arrangements for employees, with several firms considering split-work arrangements as a form of a business continuity plan.
Increasingly, this spurred more firms to be flexible in the office arrangements for employees. Mr McKellar shares, “To address the evolving needs of occupiers, some landlords have also pivoted to providing agile space solutions to existing occupiers. The latest example is Bayspace by Raffles Quay Asset Management in Marina Bay Financial Centre Tower 2.”
Office Rents in 2020 softened on the back of rising vacancy
Through 2020, there was an increase in vacant stock as firms reduced their footprint upon renewal or relocation. A diverse range of industries, namely financial, insurance and technology, also contributed to the looming secondary space in the market.
This resulted in an increase in islandwide office vacancy from 4.5% in Q4 2019 to 6.0% in Q4 2020. With emerging vacancy in the market, there was downward pressure on Grade A (Core CBD) office rents. In Q4 2020, Grade A (Core CBD) office rents corrected for its fourth consecutive quarter, declining at 2.8% q-o-q to S$10.40 per square foot per month. This represented a full year decline of 10.0% in Grade A (Core CBD) office rents, which reversed the rental growth of 6.9% in 2019.