Expect further downward pressure on rents: CBRE

Office vacancy rate increased by 40 basis points over Q4 as a result of weakening demand.

CBRE reported:

2011 was the year of contrasting halves and many market changing events. In H1 2011, almost 2.7 million sf were delivered and the market recorded high, above average, net absorption figures. In H2 2011, confidence in the economy had been undermined and it was reflected in weakened office demand.

Overall, the annual net absorption came to over 2 million sf. In Q4, however, a net absorption was modest 78,000 sf.

Going forward, the anticipated declining demand will be a key concern as corporates remain hesitant to make new investments. That said, CBRE notes that certain global industries are viewing Singapore favourably for expansion give the prospect of tax increases and with political uncertainties in the West.

On the supply side, the Singapore office market grew by 6.1% in 2011 with 450,000 sf completed in Q4.

Overall there was over 3 million sf delivered in 2011, representing a 6% increase in the total stock, and which has now reached 51.8 million sf. This is the fastest pace of office development the city has experienced over the past decade and that will be seen in the next five years based on the future office pipeline.

The significant new supply helped to improve the overall quality of the office stock and attracted international companies looking to start up operations in Asia. Looking ahead, there are some 9.8 million sf to be delivered between now and 2016.

Furthermore, a number of large units in some existing Grade B buildings were recently vacated. The sheer amount of good quality grade space entering into the market will naturally take some time to be absorbed.

As a result of weakening demand, office vacancy rate increased by 40 basis points over the quarter to reach 6.70% in Q4. In the core CBD, the vacancy rate increased to 8.80% from 7.70% last quarter. This is off the back of 3.5 million sf of available office space of which 2.3 million sf is located in core CBD.

Going forward, we expect that some of the existing secondary stock will be refurbished and it will compete with the new space. With increasing vacancy rates further pressure on rents is inevitable and will create a favourable tenants’ market.

In Q4 2011, Grade A office rents declined marginally by 0.5% to $11.00 psf/month. Grade A rents have experienced a relatively short cycle; since the last trough in Q1 2010, rents have recovered by 38%, peaking in Q4 2011 and are headed for a decline in 2012.

It is, however, unlikely that the rental correction would be as dramatic as the one experienced in the aftermath of the global financial crisis. In 2012, we anticipate a correction in the order of 10-15%. On a wider scale, island-wide Grade B office rents declined by 1% to $7.30 psf/month – the first decline since 2009 while Grade B rents in the CBD area remained stable at $7.96 psf/month.

The office market will continue to be highly competitive, balancing a downward rental movement with increasing pressure on financial incentives from occupiers.