A POTENTIAL shortage may be on the horizon for Singapore’s Core Central Business District (CBD) Grade A office market.

Following the completion of IOI Central Boulevard Towers (IOICBT) in 2024, with 1.26 million square feet net lettable area of offices, no new significant supply in this segment is slated for completion over the three years from 2025 to 2027, according to property consulting group CBRE.

That seems like good news for Singapore’s prime CBD office landlords such as Keppel Real Estate Investment Trust, Hongkong Land and CapitaLand Integrated Commercial Trust, among others.

However, a severe supply crunch of Core CBD Grade A offices may have implications for Singapore’s competitiveness. For most of last year, there was a supply overhang in the Singapore office market, mainly due to IOICBT’s completion. By mid-December, however, 75 per cent of the project’s office space had been committed.

Urban Redevelopment Authority (URA) data released on Jan 24 showed that the vacancy rate for Category 1 offices – which cover the better-quality buildings in the city area – started to trend down in the fourth quarter.

Meanwhile, vacancies for Category 2 offices in the rest of Singapore stayed elevated.

Market watchers attribute this to some occupiers, including international companies, having a strong preference for premium-specification office buildings – especially those in the CBD. While micromarkets such as Tanjong Pagar and Beach Road have their unique appeal, prime locations like Marina Bay and Raffles Place still remain highly sought after by occupiers, as part of their strategy to draw and retain talent.

By design

So why is there a dearth of sizeable Core CBD Grade A office products slated for completion in the next few years?

Well, this is by design.

The authorities have been promoting decentralisation, by having regional office clusters located further away from the CBD in places such as Woodlands, Punggol and Jurong Lake District (JLD).

The rationale behind the decentralisation strategy is sound: to reduce human and vehicular traffic congestion in the city centre by bringing jobs closer to homes.

The URA has envisioned JLD as the largest mixed-use business district outside the city centre.

Those living in or near Jurong would probably like to work in JLD. But those residing in the farthest parts of the east, such as in Changi, or the north-east, such as in Punggol, may not fancy the relatively long commute (by Singapore standards) to an office in JLD.

Connectivity will improve with planned expansions in the MRT network in the coming years. But, until then, some employers will find it challenging to attract staff if their offices are not in the central part of town.

This will become more critical with the ongoing return-to-office mandates issued by many organisations to foster corporate culture, knowledge-transfer and business competitiveness. C-Suites like being in a prestigious location like Marina Bay compared with Jurong.

This persistent preference for prime city-centre offices is reflected in rental data. Despite soft islandwide office leasing demand last year, the URA’s monthly median rental (based on lease commencement) for Category 1 office space held firm in Q4 2024 at S$12.52 per square foot (psf), unchanged from the previous quarter. On the other hand, the median rental for Category 2 offices slipped 3.2 per cent quarter on quarter to S$6.35 psf.

On a full-year basis, the median rental growth for Category 1 offices also outperformed Category 2 offices, with increases of 4.5 and 1.8 per cent, respectively.

Office leasing demand was muted last year but things are expected to improve, especially in the second half of this year, according to property consultants. Sustained economic growth may spur office leasing demand from tenants that had previously deferred relocation or expansion plans due to tight capital expenditure budgets. Continued flight-to-quality and return-to-office priorities should also support office demand.

Chua Yang Liang, JLL’s head of research and consultancy for South-east Asia, also highlighted that the increase in the seasonally adjusted S&P Global US Services PMI Business Activity Index, for the second month running in December, may have positive downstream effects on business expansion activities in Singapore – given that numerous multinational corporations operating in the Republic have their headquarters in the US.

If leasing demand improves while the supply pipeline of new office buildings with high specifications in the Core CBD is constrained, there may be upward pressure on rents. This may result in resistance from occupiers who find Singapore too expensive.

One could argue that this is precisely why decentralised offices – with lower rents – offer a good proposition. Market watchers estimate office rents in the Jurong East area today at about S$7.50 psf a month. However, for half that price, an occupier can rent prime offices in the equivalent of the Bangkok or Kuala Lumpur CBDs, based on data from JLL.

AI may blunt some of Singapore’s attraction

To put things in perspective, rental rates and business costs are not the only factors that global companies look at when deciding where to set up offices. Singapore is an established financial centre. It beckons investors with its political stability and transparency in regulations, among other factors.

Another advantage that the Republic has over some other cities in the region is an English-educated workforce – though this could potentially be negated by the increasing use of artificial intelligence (AI).

To safeguard Singapore’s competitiveness, perhaps the URA should introduce a prime CBD office site on the reserve list of the government land sales programme. Sites on the reserve list are launched for sale only upon successful application by a developer, or when there is sufficient market interest. This is unlike the confirmed list, where sites are launched for sale according to schedule, regardless of demand.

The master developer site in JLD – a white site for mixed-use development with a sizeable mandatory office component – was moved to the reserve list after it failed to be sold last year.

It may be better to let market forces operate and leave developers to assess where the office leasing is stronger, and decide whether to apply for the release of a reserve-list site with an office component in JLD or the CBD. This may help ensure Singapore’s competitiveness, and provide more choices for future occupiers.

The likes of CapitaLand Development, Hongkong Land, City Developments Ltd and Singapore Land may be keen to bid for a CBD office site – given their successful track records in this segment.