Office rents buck downward trend as occupancy improved

Landlords are more reluctant to lower rents as Q1 2010 office occupancy rate up 92.6%.

According to DTZ Research, island-wide office occupancy improved in Q1 2010 as demand increased, coupled with no new completion of office space. The average island-wide office occupancy rate rose 0.7%-point from Q4 2009 to 92.4% in Q1 2010.

Average occupancy in Anson Road/Tanjong Pagar area increased the most among the micro-markets by 3.0%-points from Q4 2009 to 92.6% in Q1 2010 as the two newly-completed office buildings - Mapletree Anson and Twenty Anson - saw an improvement in take-up rate.

DTZ Research estimated that shadow space shrank by 31.9% from 387,000 sq ft in Q4 2009 to 263,000 sq ft in Q1 2010. Excess space is being taken off the market as companies review their space requirements in view of the improving economy.

Ms Cheng Siow Ying, DTZ’s Executive Director (Business Space) said, “Most of the leasing transactions taking place were for renewals and relocations as tenants took advantage of the low rents to move to better quality buildings. Expansions, although not widespread, were noted from some financial institutions, IT companies, law firms and other business support companies.”

With office demand improving, landlords are more reluctant to lower rents despite the substantial new supply in the pipeline. Average gross rent of prime offices in Raffles Place eased by only 1.3% quarter-on-quarter (QOQ) to $7.80 per sq ft per month in Q1 2010.

Bucking the downward trend, average gross rents in the Anson Road/Tanjong Pagar area rose 3.8% QOQ to $5.50 per sq ft per month as occupancy in the area improved.
Ms Chua Chor Hoon, Head of DTZ South-east Asia Research, commented: “Although the outlook is much brighter this year with occupiers more ready to seal leasing transactions, office rents are expected to decline for the rest of the year due to the substantial pipeline supply.”

Office rents are expected to bottom sometime in 2011, or by the end of 2010 if the economy grows more strongly than expected. Rents for better quality office space are likely to recover sooner due to flight to quality. However, the recovery in office rents is anticipated to be very moderate as about 2.5 million sq ft or more per annum is expected to be completed over the next three years.