Grade A office rents to plunge 15% in 2012

The office leasing market has remained subdued for the last couple of months and won’t be picking up anytime soon.

Singapore’s GDP growth for 2011 is forecast to be around 5%. The economy expanded by 6.1% year-on- year in Q3/2011. However, economic activity looks set to weaken in the last quarter of 2011 and for the whole of 2012. In tandem with the deteriorating macro-economic conditions, the office leasing market remained subdued in the last couple of months, says Savills' report. While landlords are now more receptive to negotiating with tenants compared with a few months ago, tenants are adopting a wait-and-see approach amid the current uncertainties. Adding to the woes is the return of shadow space given up by existing tenants in the wake of retrenchments and other cost-saving measures.

After enjoying low vacancies below the 5.0% mark for five consecutive quarters, CBD Grade A offices were faced with a 6.1% vacancy rate in Q4/2011. Except for Beach Road/Middle Road, increases in vacancy rates were witnessed in most micro-markets. The Shenton Way area recorded the largest vacancy increase of 316 basis points, owing to remaining new stock, followed by the City Hall micro-market where vacancy went up 238 basis points, due largely to the secondary stock returned by Citi Group.

Grade A office rents averaged S$8.71 per sq ft per month in Q4/2011, slipping for the second successive quarter by 1.5% from S$8.86 per sq ft in Q3. For the whole of 2011, however, average rents rose 7.8%.

Compared with the remaining Grade A stock, rents in the international-grade office buildings recorded a greater decline of 4.6% quarter-on-quarter in Q4/2011. The strong rental growth seen in the first half of 2011 has been reined-in, as landlords adopted a defensive approach in attracting new tenants to fill up the remaining lettable space in their buildings.

In tandem with the softening rents, the capital value of Grade A offices also fell by 3.8% from S$2,650 per sq ft in Q3/2011 to S$2,550 per sq ft in Q4/2011. This is the first drop since capital values recovered from the trough in Q4/2009. On a yearly basis, capital values were up by 8.5% from S$2,350 per sq ft in Q4/2010.

Going forward, the worsening economic outlook could dampen job creation, especially in the banking and financial services sector. It was reported that, notwithstanding the relatively better performance of Asian economies, some banks here have started to lay-off staff as a result of the economic turmoil. In addition, more companies are likely to be conservative and hold-off possible expansion plans or even reconfigure their offices to sub-let the excess space.

This will put downward pressure on leasing activity and rental levels as tenants will factor-in the widely anticipated softening of the market. Therefore, Savills expects overall Grade A rents to trend downward by 15% in 2012 with capital values softening by 10%.