CBD prime office rents stagnant in 3Q11

Average gross rent of office space in Raffles Place was flat at $9.80 psf/month in Q3 2011, after rebounding by 25.6%  in Q1 2010.

Office rents in the CBD were largely flat in Q3 2011 while the rental growth in decentralised area moderated as leasing demand for office space turned cautious with the increasing possibility of an economic slowdown, according to DTZ Research.

Based on a basket of existing buildings tracked by DTZ Research, the average gross rent of office space in Raffles Place stood at $9.80 per sq ft per month in Q3 2011 after rising 25.6% from the bottom in Q1 2010. Rents at Marina Bay and Marina Centre were also unchanged quarter-on-quarter while those at the Shenton Way/Robinson Road/Cecil Street area rose 2.0% QOQ to $7.75 per sq ft per month.

Ms Cheng Siow Ying, DTZ’s Executive Director, Business Space noted: “Leasing activity remains subdued as occupiers become increasingly wary of the uncertain global economic outlook. Most occupiers prefer to renew their leases and expand within the building in view of the proactive tenant retention moves by their landlords.

Although some occupiers are holding back their expansion plans, we observed that there were space expansion needs from selective business sectors such as financial and professional services, IT-related companies and energy companies. There is also more interest in decentralised areas where rents are between 21% and 36% lower than rents in Raffles Place. As a result, office rents in the Alexandra area rose 1.6% QOQ to $6.30 per sq ft per month and by 2.7% QOQ to $7.70 per sq ft per month in the Novena belt in Q3 2011.”

The average islandwide occupancy rate for purpose-built offices rose marginally by 0.1 percentage point QOQ to 93.9% in Q3 2011. The occupancy rate in the Marina Bay area rose the most, by 4.6 percentage points QOQ to 74.5% as major tenants who have pre-committed to space in new projects in the area commence business operations in their new addresses. For example, Citibank, Bank Sarasin-Rabo and law firm White and Case have moved in to fill Asia Square Tower 1 which was completed in Q2 2011.

The relocation of companies to new buildings at Marina Bay has however led to an increase in vacant space in other parts of the CBD. Occupancy rate in the Raffles Place area fell by 1.5 percentage points QOQ to 92.8%. Low occupancy rate in the newly completed 137 Market Street also led to a marginal fall in average occupancy rate in the Shenton Way/Robinson Road/Cecil Street area to 92.9%.

The lower than expected tender price in the recent Robinson Road/Cecil Street government and sales site mirrors a less optimistic outlook by investors. The winning bid for the site in the CBD was about $882 per sq ft per plot ratio, just slightly higher than the $872 per sq ft per plot ratio winning bid for a commercial GLS site at Paya Lebar Road/Eunos Road 8 in April 2011. Far East Organisation was awarded the Robinson Road/Cecil Street site which received two other bids and had a bid spread of 3.8%. In comparison, the site at the Paya Lebar drew 10 bids with a bid spread of 76.4%. Both parcels have 99-year leasehold tenure and are required to use at least 80% of the maximum gross floor area for office use.

Ms Chua Chor Hoon, Head of DTZ SEA Research, noted: “Leasing activity is expected to remain low and prime rents in the CBD are anticipated to stay unchanged for the next few quarters with longer rent-free periods being offered to attract occupiers. Although the new supply for 2012 is about half of this year’s supply, mainly coming from Marina Bay Financial Centre Tower 3 in H1 2012, office space vacated by companies relocating to new premises will also be put back into the market which will have a downward pressure in rents. As the pessimistic scenario of a financial contagion from the eurozone debt crisis increases in probability, the possibility of a fall in office rents has also risen.”