Median Rents Cbd Down 08 Q O Q 3Q2024
The rental market for offices in Singapore saw a slight decline in the third quarter of 2024, following a strong rebound in the previous quarter. According to CBRE, the Urban Redevelopment Authority (URA) office rental index for the central region increased by 3.1% in the second quarter but experienced a 0.5% drop in the third quarter, reflecting the ongoing volatility in rental rates since the first quarter of 2024.
The dip in rent has resulted in a smaller year-to-date increase in office rents, which now stands at 0.8% for the period from the first to the third quarter of 2024, down from 1.3% in the previous quarter. Tricia Song, CBRE’s head of research for Southeast Asia, notes that the prime central business district (CBD) office space, particularly Category 1 office buildings, showed signs of weakness.
Median rents in the CBD declined by 0.8% quarter-on-quarter in the third quarter of 2024, following a significant 4.0% increase in the second quarter. This can be attributed to the recent surge in supply, particularly the completion of IOI Central Boulevard Towers, which added 1.2 million square feet of prime office space in the CBD. As a result, the vacancy rate for Category 1 offices rose to 10.3% in the third quarter of 2024, up from 7.5% at the end of 2023.
However, the shadow stock in the CBD Grade A office space remains low at 0.2 million square feet in the third quarter of 2024, similar to pre-pandemic levels. This is a decrease from the previous peak of 0.3 million square feet in the second quarter of 2023, according to Cushman & Wakefield (C&W).
According to CBRE’s Song, the office market has been mainly driven by lease renewals as companies adopt a cost-conscious approach amidst high interest rates and a capital-intensive environment. However, there has also been an increase in relocation activities. Song adds that landlords, facing a larger volume of available space, have prioritized occupancy over securing market-leading rents, contributing to the overall decline in rents in the third quarter of 2024.
“The office sector remains distinctly two-tiered,” says Song. “Competition for premium spaces in the best buildings remains strong, particularly for high floors with unobstructed views and lift lobby frontage. In such cases, tenants are willing to pay a premium over and above the typical Grade A average rent.”
CBRE notes a significant trend of businesses in the legal, emerging tech, and professional services sectors relocating to high-quality buildings in prime city center locations. “Occupiers are adopting a cost-conscious approach amidst high interest rates and a capital-intensive environment,” says Song. However, there has also been an increase in relocation activities. Some landlords, facing a larger volume of available space, are prioritizing occupancy over securing market-leading rents, contributing to the decline in overall rents for the third quarter of 2024, notes CBRE.
According to Wong Xian Yang, head of research for Singapore and Southeast Asia at C&W, the office market has seen some degree of right-sizing as companies adjust their real estate footprint. Some have reduced their spatial requirements, while others have moved to better quality and located offices. Net demand in the central region turned negative, dropping by 0.2 million square feet in the first three quarters of 2024, compared to a positive net demand of 0.6 million square feet over the same period last year. However, net demand in the downtown core area remained positive at 0.5 million square feet, which is about half of the one million square feet registered over the same period last year.
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Wong notes that demand for office space has been skewed towards smaller users due to the absence of large occupiers and leasing deals, resulting in constraints in capital expenditure. “Landlords are increasingly looking to offer fitted-out solutions to increase the marketability of their vacant office spaces.”
“The rise in secondary office space has created opportunities for occupiers on the flight to quality,” adds Wong. He also mentions that much of the space previously occupied by Meta at South Beach Tower has already been taken up or is in advanced negotiations by new and existing tenants.
Despite a relatively soft patch in the office market due to high interest rates, there are several catalysts on the horizon that could escalate demand and rental growth, says Wong. Most landlords are expected to hold onto their asking rents, with most Grade A offices remaining well-occupied. For 2024, CBD Grade A office rents are expected to grow by 1% to 2% year-on-year.
In terms of pricing, office prices in the central region increased by 0.6% quarter-on-quarter in the third quarter of 2024, marking the second consecutive quarter of growth. This was mainly driven by a 47% quarter-on-quarter rise in transaction volumes for strata offices in the central region, fueled by the sale of office spaces at Tong Building and Solitaire on Cecil.
Office leasing activity may pick up towards 2025, driven by interest from emerging tech industries, wealth management firms, and professional services companies, says Wong. Additionally, demand for offices in the central region is expected to be supported by a tight labor market and high office attendance, resulting from a return-to-office solid mandate. The postponement of Shaw Tower’s completion from 2025 to 2026 is also expected to tighten supply next year, with the only significant new supply coming from the completion of Keppel South Central (0.6 million square feet).
With supply tightening and demand improving due to lower interest rates, central region office rents could be poised for more robust growth in 2025, says Wong. Occupiers should be ready to capitalize on opportunities before market optimism picks up.