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Q2 rents up for CBD Grade A and Marina Bay offices

23 Jun, 2017

Grade A office rents in Singapore's CBD may have bottomed earlier than expected.

Based on preliminary second-quarter estimates, the average rental values for overall CBD Grade A and Marina Bay baskets have posted their first quarter-on-quarter increases after having declined for two years.

A stronger-than-expected take-up of offices in new developments and easing of supply pressure from 2018 to 2020 are among the factors that have contributed to the uptick in Grade A rents in the two baskets.

However, analysts warn that the overall office market is still not out of the woods, as secondary supply is poised to grow in older buildings as tenants relocate to newer projects.

Preliminary estimates show that the average gross effective monthly rental value for the Marina Bay basket rose 1.3 per cent quarter-on-quarter to S$9.51 per square foot (psf) in Q2 2017, after sliding 27.3 per cent from the recent high of S$12.90 psf in Q4 2014 and Q1 2015 to S$9.39 psf in Q1 2017.

The rent increase for Q2 2017 contrasts with a 1.0 per cent quarter-on-quarter decline in Q1 this year.

The preliminary rent figure for this quarter is down 2.3 per cent from Q2 last year.

The Overall CBD Grade A office basket (comprising Raffles Place, Marina Bay, Tanjong Pagar/Shenton Way and Marina Centre) has also posted its maiden rental uptick of 0.6 per cent quarter on quarter to S$8.49 psf in Q2, after having slipped 20.1 per cent over eight consecutive quarters. From the recent peak of S$10.56 psf in Q1 2015, rents had declined to S$8.44 psf in Q1 this year.

The Q1 number was down 1.2 per cent quarter on quarter. The preliminary Q2 figure reflects a year-on-year drop of 3.5 per cent.

Most market watchers have been expecting CBD Grade A rents to turn the corner only at the end of this year or early next year.

However, the take-up in new developments has been stronger than expected over the past six to nine months.

Major lease signings include Facebook's lease of more than 250,000 sq ft in Marina One and Uber's 55,000 sq ft in Guoco Tower. At Asia Square Tower 1, nearly all of the 130,000 sq ft or so that Google vacated last year has already been backfilled.

The Business Times understands that software giant Microsoft has signed up for about 125,000 sq ft in Frasers Tower in the Cecil Street/Telok Ayer Street locale; the building is slated for completion next year.

Microsoft is now located at One Marina Boulevard, where its lease for about 100,000 sq ft is said to expire in 2019. The tech giant did not respond to BT's queries by press time.

Besides relatively strong leasing momentum in new developments, improved overall business sentiment and the limited supply in the next few years also contributed to the increase in overall CBD and Marina Bay Grade A rents in Q2.

After the estimated 2.9 million sq ft of office space expected to be completed islandwide this year (from projects such as Marina One, UIC Building, Vision Exchange and Arc 380), completion is expected to ease to around 1.6 milion sq ft next year, followed by less than 500,000 sq ft in 2019 and about a million sq ft in 2020.

Moderate rental growth could continue in Marina Bay and in better-quality buildings in the CBD in the second half of the year.

The fact that the Grade A market has stabilised will augur well for the rest of the market, but landlords of older buildings will still need to be competitive. There is a lot of secondary stock arising from tenants vacating older buildings to relocate to new developments.

Despite the hype about the surprisingly strong office leasing volumes in new developments, agents acknowledge that it has been mostly a game of musical chairs as tenants relocate to newer buildings; there has been relatively little expansion in net demand.

The banking sector would need to make a comeback to really push net office demand up significantly.

On a positive note, there is some expansion in demand from multiple sectors, with the two most talked about being technology and co-working. That said, these two sectors occupy only a small amount of the overall office market.

Urban Redevelopment Authority data showed that the change in occupied office space shrank by 64,583 square feet of net lettable area (NLA) in Q1 this year - against an increase of 10,764 sq ft in the preceding quarter.

For the whole of last year, net demand was about 291,000 sq ft, down from 667,000 sq ft in 2015. The figure has been declining steadily since 2.3 million sq ft in 2011.

Adapted from: The Business Times, 23 June 2017