Demand for office space edges up by 0.3%

The suffering office sector looks to turn around as the year ended with returning demand and a slow down in rental decline rates.

Demand in the second half of 2009 took a slightly positive turn as the office market began to see a return of leasing interest in line with economic recovery. However, pessimism in the first half of 2009 dragged down total office demand for the whole year to an estimated -181,000 sq ft, according to DTZ Research.

The average office occupancy island-wide improved from 91.4% in Q3 2009 to 91.7% to Q4 2009. However, average occupancy in Raffles Place continued to slip from 90.9% in the previous quarter to 90.5% in Q4 2009 as some companies which had committed to space in the new buildings began moving out.

Improving market sentiments have lowered rental declines to single-digit rates in Q4 2009. Landlords were less anxious to lower rents particularly in buildings with healthy occupancy rates. Average monthly gross rent of prime offices in Raffles Place fell the most by 7.1% to $7.90 per sq. ft. per month in Q4 2009. This is followed Marina Centre
which saw a 5.3% drop in rents to $7.10 per sq ft per month. The rental fall in other areas was less than 5% in the quarter. In the Anson Road/Tanjong Pagar area, rents fell by 1.9% to an average of $5.30 per sq ft per month despite competition from newly completed buildings.

Ms Chua Chor Hoon, Head of DTZ South-east Asia Research, commented: "Despite improving demand, the office market is expected to stay competitive in the next two years as more new buildings get completed. An annual pipeline supply of 2.82 million sq ft in 2010 and 2011 is expected to come onstream, more than the 2.36 million sq ft completed in 2009. Existing buildings would face more pressure as there would be
musical chair movements when Marina Bay Financial Centre and Mapletree Business City with substantial pre-commitment rates are completed next year."

Office rents are expected to recover in 2011, although an earlier recovery at end-2010 is plausible if the economy grows at a stronger rate than expected and more existing office buildings are redeveloped. There are already plans for office buildings like VTB Building, UIC Building and 76 Shenton Way to be redeveloped for other uses and more office buildings are expected to follow suit.