Cracks appearing in Singapore’s prime office rental market as rent growth eases

Citi Commercial Pte Ltd

RENTS in the prime Raffles Place/Marina Bay precinct grew 1.3 per cent in the first half of 2024, slowing from the 2.5 per cent increase from the year-ago period, according to a report by Knight Frank on Monday (Jun 24).

On a quarterly basis, prime office rents rose 0.7 per cent in the second quarter to an average of S$11.28 per square foot per month, up from the 0.6 per cent growth seen in the first.

“Despite the larger islandwide trend of rents either holding or increasing marginally, some landlords have started to adjust their rental expectations, especially for buildings with pockets of available space,” said Knight Frank.

Data from Cushman & Wakefield (C&W) showed that Central Business District (CBD) Grade A office vacancy rose to 5.4 per cent during Q2, from 3.6 per cent in Q1.

The rise in vacancy was due to the completion of IOI Central Boulevard Towers and Odeon 333 with a combined net lettable area of 1.3 million square feet (sq ft) which outweighed net demand of 0.6 million sq ft in Q2.

“Many Grade A office landlords, assured by high occupancy rates, continue to be sanguine on the prospects of the Singapore office market and have largely held on to their asking rents” said Jeryl Teoh, senior director and co-head of commercial leasing at C&W.

Occupancy levels in the Raffles Place/Marina Bay precinct and in the overall CBD area had declined to 95 per cent and 93.6 per cent, respectively, in Q2, from 95.6 per cent and 94.7 per cent in the preceding quarter, said Knight Frank. The consultancy attributed this dip in occupancy levels to the longer lead time for decanted spaces to be absorbed.

More decanted spaces surfaced in the market as certain companies in the financial and technology sectors began consolidating their business functions, typically in one location.

For example, Tencent, recently announced their relocation to CapitaSky, while fellow tech giant Meta will not be renewing 115,000 sq ft at South Beach Tower, and will consolidate at Marina One. French bank BNP Paribas was also reported not to be renewing some of its current space at Ocean Financial Centre.

As more quality decanted space becomes available, Knight Frank said that landlords face pressure to moderate their rent expectations.

“With the completion of IOI Central Boulevard Towers and substantial upcoming lease expiries, we are observing that landlords are prioritising occupancies in their own developments, as they are increasingly more aware of the fact that tenants have more space options in the market,” said Tricia Song, CBRE’s head of research for Singapore and South-east Asia.

David McKellar, CBRE’s co-head of office services and occupier services, added: “As a result, they are prioritising occupancies in their buildings and are therefore more willing to negotiate on rents.”

C&W’s senior director and co-head of commercial leasing, Leong Deyang observed that the high interest rate environment continues to dampen new office demand.

“There are signs of cracks appearing,” he said. Some right-sizing activities have continued as occupiers look to reduce cost and align their workplace to a hybrid work model, he noted.

“Excluding the net demand stemming from the IOI Central Boulevard Towers pre-commitment, Q2 2024 net demand would fall to only 33,000 sq ft, similar to 30,000 sq ft in Q1 2024,” added Leong.

The report from Knight Frank cited the insurance and private-wealth sectors as continuing to support growth amid the quiet office-leasing market.

CBRE said: “Firms in the legal sector and some of the Chinese technology giants have been some of the biggest contributors towards the expanded demand this quarter. These sectors have shown strong demand, in spite of perceived macroeconomic uncertainties.”

Song added: “While H1 2024 has been weighed down by the uncertainty of new completions, we may see a pick-up in H2 2024 with leasing activity for new developments gaining momentum. Flight to quality and relocation activity from redevelopment projects and transitional sites will help to drive demand.”

With landlords increasingly willing to offer reasonable rents to keep buildings filled, especially with space consolidation and reduction by technology firms and banks, Knight Frank expects rents in H2 to be largely unchanged and full-year rents to grow between 1 and 3 per cent.

C&W forecasts vacant office space to remain concentrated within a few developments for 2024, with most Grade A offices remaining well occupied. “As such, landlords continue to hold the upper hand, although their advantage is starting to diminish,” said C&W.

C&W’s forecast for CBD Grade A office rents this year is between 0 and 2 per cent, while CBRE expects rents to grow by 2 to 3 per cent in 2024.

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