Office rents to continue spiraling down amidst near-term supply glut

Rents could bottom over 12-13 quarters.

With the large office supply bound to come next year due to strong completions in the near term, office rents are posed to continue sliding.

"While rents continue to fall, we think the market could instead focus on a bottom for the sector. We expect rents to bottom over the next 5-6 quarters and REIT prices could react ahead," Maybank Kim Eng analyst Derrick Heng said.

Quoting second quarter data from CBRE, the analyst said there was a five-quarter dip for Grade A office to SGD9.50 psf pm, with a cumulative decline at 17%

"If the previous down cycle is repeated, rents could bottom over 12-13 quarters, after retreating by 30-33% from their last peak," the report noted.

This would imply a possible bottoming to around $8 psf pm by early 2018, which is consistent with projections of lower supply completions from 2018.

In 2019, only the 204k sq ft of office space from the redevelopment of Funan is the only known prime office supply in 2019. Aside from this, another 532k sq ft. would be erected at Woods Square.

The report noted that while the impending redevelopment of Park Mall in Orchard and CPF Building on Robinson Road should introduce more space in 2019 and beyond, the maximum lettable office space from the two is unlikely to exceed 900k sq ft.

"This compares with an annual absorption rate of 1.4m sf since 2009. Therefore, vacancy levels could improve materially from 2019," Maybank said.

Only the tender for the white site at Central Boulevard is the only other source of prime office supply beyond 2020.

"Fierce competition for the Central Boulevard land tender in the Marina Bay precinct could send a positive signal for office assets as over 70% of the site will be used for offices," the analyst stated.