Are existing office spaces soon to be ghost towns?

A two-tier market within Grade A office space is on a tear, due to a spate of relocations from existing office buildings to newer ones in the CBD.

According to Ong Kah Seng, Senior Manager for Research in Asia Pacific at Cushman & Wakefield, “the 2-tier Grade A office market is such that there will be a 2-paced recovery in the rents between newly completed and existing Grade A office buildings. This is partly due to a spate of relocations from existing office buildings to newer ones in the CBD, especially as a number of financial institutions pre-committed to new office space in 2010 for the new office space were going at attractive rentals (when they were undergoing constructions then).”

When such space is vacated as the tenants relocate to newer buildings, the existing buildings’ vacancy may rise marginally but many of these space were of good configurations and are expected to receive keen interest from other tenants, he noted.

On the other hand, the Urban Redevelopment Authority reported that there was still a 3.6% increase in office space prices in Q2 2011, but the the rate of increase in rentals and prices has reduced.

So why was there a slowdown in Strata office price increase? According to Mr. Ong, the slowdown in strata office price increase was due to an overall cautious individual investor attitude where private investors are careful in investment decisions in the face of economic slowdown and a general run-up in prices over the past year.

“However, we expect to continue to see more investors shifting their focus from residential investments to strata office, retail and industrial units as the residential sector is expected to face more government intervention should price increase and optimism failed to be contained by the last round of cooling measures in January,” he said.

Similarly, the slowdown in office rental increase is the result of increasing price sensitivity of stakeholders as overall business costs have increased.

Nevertheless, the office property sector is expected to achieve continued leasing and rental growth momentum, although occupiers may be increasingly realistic in the face of modest economic growth, increased business costs and more space options, particularly as a two-tier rental market becomes more pronounced arising from flight to quality office space (relocation), he noted.

But according to Mr. Ong, despite the slowdown in rental and price increase, Singapore’s commercial property market still faces other challenges including the debt crisis in US and Europe, which are affecting the bottomline of many MNCs whose HQs are in.

“Another challenge is the development of a 2-tier office market, i.e. the flight to quality office space, but this can be mitigated by timely backfill of available space with an overall economic stability albeit a slowdown,” he added.

Looking ahead, Mr. Ong sees that the growth of Grade A office rentals for the remaining 2 quarters of 2011 are estimated to moderate to about 2% to 3% q-o-q increase, reflecting a slowdown in leasing activity and increased cautiousness among occupiers in the face of moderated economic growth in 2H 2011.

“A two-tier market within Grade A office space, between newer and older space, is and will be increasingly pronounced, particularly as some tenants which pre-committed new space have to relocate. However, there are still opportunities for existing buildings, particularly for space which have to be vacated which have good property specifications, such as contiguity and prominence. Some existing buildings are also ‘tried and tested’ office buildings which have been well positioned for a long time, and costs sensitive tenants, may be keen to lease the space available,” he said.

On the other hand, he also said that the suburban office market is set to grow going forward. It may re-emerge as an important tier within the office market, offering occupiers an opportunity to conduct their businesses at well-positioned new office space in suburban locations which will be rejuvenated.

Decentralization, i.e. relocation from prime office buildings to suburban locations, is however likely to be confined to users which do not require a central business location. The core business functions of financial institutions will still find it essential to have a CBD address as a prestige, convenience and an important working address consideration for the talents they wish to attract, he noted.