CBRE Research reports that the office sector in Singapore is showing signs of bottoming and might possibly be seeing a rebound. However in our view, we expect there will be further deterioration from here before a turnaround will be seen for the sector.
Rents have been moderating but no drivers for growth in sight
While the decline in office rents has slowed over the last few quarters, we think that that is partly due to a technical stabilization of the market as the lower rents were able to attract tenants to the CBD. At the moment, we do not see any material growth drivers for the office sector. Slower global economic growth and conservative corporate expansion plans will limit the pickup of the sector in the near term. Demand for prime CBD office space, traditionally from the financial services sector, remains weak as Singapore face higher unemployment and fewer job vacancies
Source: URA
Category 1 - office buildings located in core business areas in Downtown Core and Orchard Planning Area which are relatively modern or recently refurbished, commands relatively high rentals and have large floor plate size and gross floor area
Category 2 - Remaining office space in Singapore not included in Category 1
Landlords have been sacrificing rental growth to keep building occupied. Occupancy levels could give way next, in the face of large oncoming supply
There was a large supply of office space in 2016 with the launch of Guoco Tower (0.9 million sqft). 2017 is expected to be another record year for office supply with Marina One (1.9 million sqft) providing even more prime office space in the Marina Bay area. The last two years were essentially the peak of office supplies which resulted in softening rents which is continuing to trend down. Currently, attractive rents and leasing incentives have kept occupancy level stable but going forward, we expect the occupancy rate to gradually slightly decline as landlords with holding power will attempt to ride out the current bottom and be less keen to continue to contract at lower rental rates.
Source: URA
Source: URA
Singapore still competitive in office rents for Asia Pacific
We expect Singapore office rents to decline further in the next few quarters as landlord competes with newer buildings coming to the market. While pre-leasing activity for the new buildings is strong, the vacated space from the older buildings will remain a challenge to be filled. We think the office market in 2017 will be similar to 2016 with rents trending lower and vacancy rates increasing. That being said, Singapore remains competitive in office rents among other established Asia Pacific cities, ranking way below historical rival Hong Kong and hence should see some support in terms of rent in core CBD areas.
Source: URA
Conclusion
We expect office rents to continue to soften further, with an estimated c.5% more to go from current levels. Occupancy levels could also fall as landlords with stronger holding power hold off from low yielding leases and wait for the turnaround in the sector which is expected to happen from 2019 onwards (as supply had peaked in 2016 & 2017).