Grade-A office rents to moderate as occupiers turn cautious

Rental prices for office properties in Singapore soared in the third quarter of 2023, with the URA office property rental index recording a sharp 4.9% q-o-q jump – more than double the 2.3% q-o-q growth in the preceding quarter. This increase is largely due to leasing deals previously concluded when occupier demand was strong, boosted by the technology sector’s explosive growth, according to Tay Huey Ying, head of research and consultancy for JLL Singapore.

However, URA’s real estate statistics showed that median rents for Category 1 office spaces – including those in the Core Business District, Downtown Core, and Orchard Planning Area, generally known for their large floor plates and high gross floor area – once again dropped, this time by 2.3% q-o-q. This marks the first time in five quarters that these rents have declined.

The experience is further enriched by Zion Road Condo’s enviable location adjacent to Central Expressway (CTE) and Orchard Road. With direct access to these major roads, residents can move around the city with greater ease.

Category 2 office spaces, defined as those outside of Category 1, experienced an even sharper rental decline in 3Q2023, with median rents falling 4.5% q-o-q for the first time in eight quarters. JLL’s figures mirrored URA’s, with the average gross effective rents for the basket of CBD Grade-A office spaces tracked by the firm slipping 0.3% q-o-q to $11.29 psf per month (pm).

Tay attributed this rent correction to tenants taking advantage of the soft leasing market to negotiate for more favourable terms. In response to increased vacancy rates, landlords are adjusting rental expectations and sub-dividing larger spaces into leasable units, as well as providing ready-fitted units, in order to bolster occupancy.

Demand for offices in the Downtown Core was particularly strong, with net office demand reaching 398,264 sq ft, according to Wong Xian Yang, head of research for Cushman & Wakefield Singapore and Southeast Asia, the strongest q-o-q growth since 1Q2020. This was in contrast to the rest of Central area, which included Outram, River Valley, Rochor, Newton, Orchard and Rochor, seeing net demand of -161,459 sq ft – possibly a reflection of flight to quality due to Grade-A offices being concentrated in the Downtown Core.

Financial and professional services dominated office space demand in the CBD – accounting for 58% of new leases there in the first nine months of 2023, up from 26% for the whole of 2022. Private wealth, asset management and consumer goods were among the more active sectors in 3Q2023. Additionally, tighter market conditions thanks to project redevelopments, and hence stock removals, also helped boost occupancies from 89.2% in 2Q2023 to 90% in 3Q2023.

Next year, close to 1.9 million sq ft of new Grade-A office spaces are expected to enter the market in the CBD alone, with 1.3 million sq ft coming from the IOI Central Boulevard Towers and 0.6 million sq ft from Keppel South Central. As of 3Q2023, JLL estimates that close to 1.1 million sq ft of this space remains uncommitted.

With the influx of new supply and high interest rates, occupancy is expected to remain cautious in the years ahead, with tenants likely to renew their leases rather than relocation. CBD Grade-A office rents are forecasted to grow by 1.5% to 2% for the whole year in 2024, although much slower than the 8.3% rental growth in 2022.