Office rentals fell over the last three quarters

Tight office supply is expected moving forward as only around 70k sq ft office space are slated for opening in 3Q12.

After office rentals reached an inflection point in 3Q11, OCBC Investment Research said that rental levels dip over three consecutive quarters as macro economic uncertainties held sway over the market.

In 2Q12, Grade A office rentals fell an additional 4.7% QoQ – cumulating to a 8.7% dip over 4Q11-2Q12 from S11.06 to S$10.10. On the other hand, the fall for Grade B rentals over 2Q11 was a more subdued 0.6% QoQ, mostly due to a relatively smaller Grade B supply over the period.

However, as limited new supply came into market over 2Q12, OCBC noted that core CDB vacancies showed a reversal from a rising trend to register a 0.9% dip to 8.4%. A similar picture was seen for island-wide vacancy rates which declined 0.9% from 7.3% as of end 1Q12 to 6.4%.

But office absorption coming in above expectations.

According to OCBC, net absorption in 2Q12 came in at ~470,000 sq ft which contributed to a decline in
vacancies. "This was in line with our forecast but markedly above market expectations which anticipated a weaker demand given a weaker GDP forecast in Singapore and softer hiring expectations. We estimate that Grade A capital values had dipped 2% QoQ marginally to $2,450 psf in 2Q12 (1Q12: S$2,500 psf) as investment sales slowed and market players adopted a wait and see attitude in light of the residual
uncertainty in the macro-economy," said OCBC.

Limited supply till 2H13.

Looking ahead, OCBC said that it is likely a situation of limited office pipeline completion would ensue in the reminder of FY12 with only ~70k sq ft of office space (a mixed use development in Upper
Pickering St) slated for opening in 3Q12, which has been fully pre-leased to AGC.

"Given this, vacancies could continue to face downward pressure, in our view, until mid 2013 when Asia Square T2 and The Metropolis T1&2 are completed," it added.