New offices are up but where are the employees?

Office absorption to be impacted by weaker GDP outlook. The MAS recently calibrated its FY11 GDP forecast from 5%-7% to 5%-6%. We expect the uncertain economic outlook to impact job creation and subsequently demand for office space. We examined job creation statistics at key industries (infocomm, finance, business and other services) driving office absorption, and estimate net job creation at these industries to fall from 65k currently in FY11 to 55k per year over FY12-13. Accordingly, we see net office absorption falling from 2.0m sq ft in FY11 to 1.5m sq ft per year over FY12-13.

Ample supply in the pipeline beyond 2013. We believe there was, before 2Q11, a lack of visibility in the market with regards to the supply pipeline beyond 2013. However, the recent announcements of future developments such as the Market Street Carpark project (0.7m sq ft) and the M+S projects (2.9m sq ft) likely dispelled any perceptions of limited supply going forward. With the current pipeline, we estimate that the office stock would increase by 2.4m sq ft, 1.5m sq ft and 3.0m sq ft over FY11, 12 and 13 respectively, bringing the total office stock island-wide to 84.8m sq ft by end FY13.

To hit inflection points in 2012. We see net absorption mostly balancing out net supply over FY11-12, resulting in stable vacancy rates of around 12%. In FY13, however, we expect vacancy to spike to 13.7% as ~3m sq ft of office space comes online versus 1.5m sq ft net absorption. As a result, rentals could dip 5% and 8% in the central and fringe regions respectively. Historically, capital values are more volatile and we estimate capital values in the central and fringe areas could fall 8% and 10%, respectively.