SINGAPORE - A flight-to-quality among office occupiers is weighing down on rents and occupancies at older Grade A office buildings, where more space will be freed up as these tenants move into new prime offices.
This is giving rise to a "two-tiered performance" in the prime office market, with Grade A offices seeing steeper declines in rents than the so-called "Grade A-plus" offices in the coming quarters. Average office rents will continue to fall before bottoming out in 2018, property consultancy Knight Frank projects.
These Grade A-plus offices refer to newer buildings with better specifications in the prime office market.
With the downside risk in office rents already well-documented ahead of looming completions of massive projects, market observers have started speculating when the bottom will be reached.
But some analysts are expecting the bottom to arrive sooner. DBS Group Research and Religare are tipping a bottom in the second half of 2017; Maybank Kim Eng has projected a bottoming-out of office rents over the next five to six quarters, which suggests Q4 2017 to be the earliest for that to happen.
Knight Frank head of office Calvin Yeo said: "Competition for tenants will be rife, particularly among buildings vying to backfill vacancies from tenants relocating to quality (spaces) over the upcoming quarters.
"Buildings with significant net lettable area (NLA) due for lease renewal from now till 2018 will continue to be under threat of losing tenants to quality buildings," he added.
During the third quarter, Grade-A office space in the Raffles Place/Marina Bay district saw the largest quarterly decline of 2.9 per cent in monthly gross effective rents (which exclude fit-out period but include rent holidays and service charges) to S$8.20-8.70 per square foot (psf). This is followed by a 2.7 per cent fall for Grade A office spaces in the Marina Centre and Suntec City areas to S$8.10-8.60 psf.
The pursuit of tenants by upcoming office projects in recent quarters has been at the expense of older Grade A buildngs, which will see some tenants moving out soon when those swanky new buildings are completed.
The Business Times had earlier reported a slew of pre-lease commitments inked in new projects. ING, which now occupies 70,000 sq ft at Republic Plaza, is close to securing a similar amount of space at Guoco Tower in Tanjong Pagar Centre. Itochu Singapore, also currently at Republic Plaza, is also taking up 28,000 sq ft at Guoco Tower.
Communications agency Dentsu Aegis Network, which now operates from 77 Robinson Road and has member firms in several other locations, is said to be finalising a lease for about 90,000 sq ft at Guoco Tower.
Cybersecurity company Palo Alto Networks is moving out of its 20,000 sq ft of space at Millennia Towers to take up some 36,000 sq ft at Guoco Tower.
Amadeus, a global IT solutions provider for the travel industry, now occupies over 20,000 sq ft at Parkview Square in North Bridge Road and is said to be taking up a lease for 36,000 sq ft at Guoco Tower.
Swiss private bank Julius Baer, which has inked a lease at close to double-digit rent for a "high density floor" spanning 100,000 sq ft at Marina One, is slated to give up its 72,000 sq ft of space spread over two floors at Asia Square Tower 1.
"Upcoming vacancies in Grade A buildings will increase in the next two years as these tenants relocate, and put pressure on rents as a result," Mr Yeo said.
A skyscraper index released by Knight Frank this month, which tracks rental performance of commercial buildings over 30 storeys high, showed that prime office rents on the upper floors of Singapore skyscrapers are the eighth most expensive globally.
Asia-Pacific cities saw the highest rental growth, with towers in Shanghai recording the strongest growth in the world of 7.6 per cent in the first half, followed by Sydney, Hong Kong and Taipei. Singapore bucked that trend with a 7 per cent drop.
This article was first published on September 27, 2016.
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