Growing demand for office space results in better-than-expected rental growth

Continuing from the healthy leasing activity in the second half of 2013, the office market recorded another quarter of strong take-up in Q1 2014. Occupancy rates continued to climb in the CBD, supporting further increases in rents. This rental growth momentum is expected to continue until 2015 in view of the limited supply, according to DTZ.

Net absorption for Q1 2014 was about 572,000 sq ft, indicating consistent quarter-on-quarter (q-o-q) improvement in take-up since Q2 2013. Demand in Q1 stemmed mainly from occupiers expanding within existing buildings or taking larger space within new premises. Google, for example, took additional space in Asia Square Tower 1 while Shell leased a larger amount of space when they relocated to Metropolis.

While demand from the non-financial sectors continued to hold up, sentiment in the banking and finance sector is fairly mixed. According to the Hudson Report on Employment Trends Q1 2014, the banking and financial services sector in Singapore has seen an increase in hiring intentions across three consecutive quarters, up 7.4 percentage-points to 50% in Q1, which should translate to an increase in demand for office space. However, this has not been seen across the board as many banks still remained cautious and instead sought to optimise resources and reduce costs.

Shadow space was estimated to be around 270,000 sq ft in Q1, with the largest proportion in the decentralised areas due to the Ministry of National Development (MND) putting up several floors in Jem for sublease. While the amount of shadow space is the highest since Q2 2012, it is expected to be quickly absorbed as there has been significant interest for the available space. For example, General Motors is reported to have selected OUE Bayfront for the relocation of its international headquarters from Shanghai and could possibly absorb the shadow space put up by Bank of America Merrill Lynch within the building. At Marina Bay Financial Centre Tower 2, Barclay’s surplus space which has been on the market for almost a year is also expected to be taken up very soon. Likewise, several firms have indicated keen interest in sub-leasing MND’s space at Jem.

Cheng Siow Ying, Executive Director of Business Space commented: “The first quarter of 2014 was characterised by waves of location shuffling, as movements into recently completed buildings like The Metropolis, Nexus @ one-north and Asia Square Tower 2 took place. At the same time, landlords of buildings with vacated spaces have been proactively securing new tenants. For instance, most of the floors vacated by Shell at UE Square had already been signed up with new tenants before Shell relocated to The Metropolis, while Pontiac Land has backfilled some of Allianz’s former space in Centennial Tower after the group relocated to Asia Square Tower 2 late last year. Occupancy rates have therefore remained high in the different sub-zones, sustaining a landlord-favourable market.”

In Q1, the islandwide occupancy rate increased by 0.4 percentage-points q-o-q to 95.1%. In Raffles Place and Shenton Way/Robinson Road/Cecil Street where occupancy rates are higher respectively at 96.1% and 97.9%, average gross rents increased by 4.2% and 3.9% respectively q-o-q to S$9.95 and S$8.00 per sq ft per month. On a year-on-year (y-o-y) basis, rents in these areas have increased by an average of 8.8%.

In Marina Bay, which holds only premium grade buildings, average gross rents have increased by a slightly higher 4.5% q-o-q or 9.5% y-o-y to $11.50 per sq ft per month. Within the newer developments such as Asia Square Tower 2, there have been several outlier deals on smaller-sized units where rents have hit the mid-teens.

In the near-term, the only major new completion within the CBD is CapitaGreen (700,000 sq ft) in Q4 2014. Almost half of the new office supply between Q2 2014 and 2015 will be in decentralised areas, with completions of major developments such as Paya Lebar Square (431,000 sq ft), Westgate Tower (305,000 sq ft), Futuris/Synthesis/Kinesis (93,000 sq ft) and Galaxis (41,000 sq ft).

Rents in the CBD are expected to grow at a healthy rate of between 10 to 15% in 2014. This is higher than DTZ Research’s previous forecast, as robust demand amid an environment of high occupancy rates will reinforce landlords’ bargaining power. Based on historical trends, office rents can rise quite quickly as the market is extremely reactive to demand and supply pressures.

Lee Lay Keng, DTZ’s Regional Head (SEA), Research, commented “Strong rental growth however may not be sustainable for long due to supply-side pressures in 2016. The three heavyweight developments, Guoco Tower by GuocoLand, and the two M+S sites MarinaOne and DUO are all scheduled to be completed in 2016 and will collectively yield around 3.3 million sq ft of premium grade office space. Together with other smaller developments, the estimated amount of new office supply in 2016 will set a record high of close to 4 million sq ft. While MarinaOne and Guoco Tower are likely to compete for the same tenants, there will also be increased competition for tenants from strata-titled developments such as Eon Shenton and Oxley Tower. This is likely to exert downward pressure on office rents until the market can effectively absorb the large supply.”


Source: DTZ

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