Grade A offices under threat as tenants take flight to quality

Grade A offices in Raffles Place/ Marina Bay district worst hit.

Competition for tenants will be rife, particularly among buildings vying to backfill vacancies from tenants relocating to quality over the upcoming quarters, said Knight Frank (KF).

According to KF, buildings with significant Net Lettable Area (NLA) due for lease renewal from now till 2018 will continue to be under pressure of losing tenants to quality buildings.

Data from KF show that Grade A office space in the Raffles Place / Marina Bay district saw the largest quarter-on-quarter (q-o-q) rental decline of 2.9% of the various locations in Q3 2016, while Grade A+ office space in the same area saw rental decline moderate slightly, falling 2.1% q-o-q.

Grade A offices in the Shenton Way / Robinson Road / Tanjong Pagar cluster fell at the lowest rate of -1.5% of the various locations, after having fallen most quickly the preceding quarter. However at $7.70 psf in Q3 2016, rents are at its lowest since Q3 2010.

KF noted that whether this slowdown dissipates or becomes more acute remains to be seen, contingent on the rate of these vacancies being backfilled.

"The pursuit by upcoming and newer buildings to secure tenants gained momentum in the past two quarters. Several established tenants from Grade A buildings will take flight to Grade A+ quality in the coming quarters," KF said in a report.

According to KF, 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.

Moving forward, KF expects a two-tiered performance in the prime office market. It sees greater divergence in rental and occupancy performance in the prime office market, as Grade A offices are expected to see larger rental and occupancy declines than Grade A+ offices in the upcoming quarters.

According to KF, Singapore’s prime office rents for upper floors in skyscrapers, ranked eighth regionally, will stand more favourably with businesses looking to locate or increase their footprint in Singapore, as compared to major global cities in the region, Hong Kong and Tokyo, which were ranked first and third respectively, in KF’s latest Global Cities Report 2017.

KF projects that average office rents will continue on its path of decline, before bottoming out in 2018.