CBD Grade A office rents moderate 1.2% in Q2

Further rental declines expected over the next two quarters.

Average grade A office rents in the Central Business District (CBD) moderated 1.2% QoQ in Q2 to $10 per sqft, whilst grade B rents slid 1.8% QoQ on a like for like basis, according to Colliers International.

Colliers International Head of Research for Singapore Tricia Song expects to see further rental declines over the next two quarters, as leasing demand continues to weaken as the global economy slows down.

“Further, landlords are starting to offer longer rent-free periods, and we are likely to see higher incentives reflected in the next quarter,” she added.

Landlords are focusing on tenant retention resulting in a 1.7% QoQ decrease in premium and grade A rents in Raffles Place and New Downtown, according to Rick Thomas, Head of Occupier Services in Singapore at Colliers International. However, there is room for more negotiation in the grade B office market which saw renewals and new leases pushing down rents by 6% to 10%.

In addition, relatively muted CBD grade A supply should be expected through 2021, with annual expansion averaging 3% of stock versus 5% for the last five years. The next major supply wave of about 7% of stock is scheduled for 2022.

On the other hand, CBD grade A vacancy rose to 4.6% in Q2, from 3.1% in Q1 and could rise further as the year progresses and new supply enters the market. Colliers Research forecasts vacancy could rise to 7.5% by the end of the year.

Flexible workspace sector was the demand driver in the quarter. New space take-up includes JustCo’s 45,000 sqft new branch opening at OCBC Centre East, and Arcc Spaces’ 19,000 sqft flagship centre at One Marina Boulevard.

Meanwhile, total office or mixed office investment volumes grew 76.7% QOQ to $1.3b in Q2 despite the circuit breaker, bringing the rolling 12-month volume to $6.2b. Sales during the quarter were driven mainly by two major transactions both sold by Perennial.

Furthermore, average imputed capital value of CBD Grade A office properties declined 0.6% QoQ to $2,504 psf, in line with the rental declines in Q2. Colliers’ valuation team, meanwhile, maintained cap rates unchanged at a range between 3.15% and 3.50% in Q2. However, the study remains optimistic and expects long-term capital value growth to be intact, at 2% p.a., versus the long-term rental growth of 3.3%.