Office occupancy rates in Singapore predicted to fall below 90%

Supply-demand mismatch is just short-lived.

DBS thinks office occupancy rates will fall below 90%.

DBS noted that the current signs of strength are due to a temporary mismatch between office demand and supply. The improvement in rents was achieved through both an increased net appetite for space (204,500sf was absorbed in the quarter) and the demolition of older inventory (160,400sf) to make way for redevelopment.

This squeezed occupancy up a tad to 91.2% island-wide.

Here's more from DBS:

Singapore’s office sector has held up better than we expected so far this year with first half rents remaining flat since late 2012. We had previously projected declines of 5%-10% this year but average office rents moved up 0.2% sequentially in the second quarter, the first uptick in 14 quarters.

Meanwhile, capital values rose a further 3.6% in the first half, bringing the total appreciation to 44% since the third quarter of 2009.

Fringe office values did better in second quarter than they did in the central area, with capital values improving 6.3% in the first half compared with a 3.9% rise for central located assets.

The underlying fundamental trends supporting Singapore’s office sector also remain intact. Business formation turned positive after a negative fourth quarter and a quiet February this year.

And there is also a strong correlation between office space demand and GDP growth, which is expected to improve this year and next.

With at least 83% of 2013’s office coming on-stream in the second half of the year, we expect tenant relocations to newer outfits to cause frictional vacancy that could drag on rents for older buildings.

We expect rents to end the year relatively unchanged, between a 5% contraction to 0% (compared with falls of 8% to 5% previously.)

Occupancy is likely to hover around the 89%-90% mark. Capital values are likely to remain flat as cap rates have compressed back to pre-crisis levels.

Demand is expected to remain positive but with the US economic recovery in its infancy and China’s economy decelerating, transactions are likely be for smaller bite-size lots of about 10,000sf while annual demand will run below the long-term average of 1.2-1.3msf.