OFFICE RENTS PLATEAU AS OCCUPANCY LEVELS EASE IN THE QUARTER
Against a backdrop of wider financial turmoil, offices rents have peaked. The slowing rental growth trend that we had first observed starting from Q1 08 appears to have run its course, such that both Grade A and prime rents remained static at $18.80 psf/month and $16.10 psf/month over the past quarter. Landlords are adopting more reasonable asking rents, although in the immediate term occupiers will still face rentals that are at all-time highs. We will continue to monitor the trend over the next few months to see how swiftly the fast approaching new office supply allied with slowing demand will combine to bring down rents from today’s levels.
Grade A vacancy rose to 1.2% in Q3 08 up from 0.6% in the past two quarters. This is the first time in eight quarters (since Q3 06) that Grade A vacancy has risen above the 1.0% mark. There were slight increases in vacancy rates for most micromarkets in Q3 08 – the exception being Orchard Road, which saw a one percentage point drop in vacancy due to higher occupancy at the newly completed Visioncrest and at Starhub Centre.
Whilst office leasing momentum has eased in the past few months, particularly for prime offices, office demand is still in positive territory. While occupiers are understandably cautious given the challenging financial and economic environment, a number of recently announced pre-commitments demonstrate that there is underlying confidence in Singapore’s relative position. JP Morgan renewed and expanded its premises at Capital Tower, taking a further 40,000 sf. Advertising giant, WPP pre-committed to lease the transitional office development at Land Parcel B Scotts/Anthony Road for 14 years. At MBFC Tower Two, three foreign companies – BHP Billiton, Macquarie Group and Murex South-east Asia have pre-leased some 241,000 sf. This boosted occupancy of the first phase of Marina Bay Financial Centre to an impressive 65.6%, almost two years ahead of its completion in Q2 2010. Many occupiers are, however, chasing lower costs and are relocating to decentralised locations, built-to-suit facilities and business park space.
CBRE estimates the confirmed new office supply over the next five years at 10.64 million sf. We do not consider this volume of supply excessive based on our estimated average annual demand of 1.6 million sf. It should also be noted that approximately 26% of the new supply has already been pre-committed.
No office development sites were awarded in the quarter. In the year-to-date only about $882.8 million worth of land was awarded for office use compared to $5.55 billion as at Q3 07, reflecting a 84.1% y-o-y decrease. We foresee limited appetite for further speculative office development given the outlook for falling rents, uncertainty on whether the current demand will hold up and the difficulties developers have in securing development financing.
Two transitional office parcels were launched in the quarter. A 66,484-sf parcel located at Mohamed Sultan Road and a 126,355-sf plot at Mountbatten Road. We expect few bids for the two parcels. There were eight transitional sites launched since July 2007. Some 645,000 sf (NLA) of offices will come on-stream in 2008–2009 from the five transitional office sites awarded. In light of the current situation, we believe that the government should review the necessity of launching more transitional offices in the immediate future. Another land tender will close at Ophir Road site in the final quarter of 2008.
Market fundamentals have changed and sentiments have deteriorated. Pre-commitment rent levels are likely to come under pressure as occupiers factored in the widely anticipated softening of the market. We had earlier anticipated rents would only soften beyond 2010. With the events of the past few weeks, we believe that the correction has been fast-forwarded to early 2009. The magnitude of rental correction will to an extent be contingent on external factors including the prospect of recession in the US and Europe and the outcome of attempts to shore up the financial crisis. Singapore’s office market appears better placed than many markets going into a period of economic slowdown, but it is not insulated.
Source: CB Richard Ellis
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