Office rents feared to slip by as much as 15% this year

Demand will stay muted as tenants downsize.

The next three quarters will prove to be tough for office landlords across Singapore. Statistics from the Urban Redevelopment Authority (URA) show that rents of prime office space in the city-state dropped by 2.1% quarter-on-quarter in Q1, on back of persistently weak demand from key tenants in the financial services and oil and gas sectors.

“Global headwinds have intensified in the last three months, further dampening business sentiment and resulting in businesses becoming increasingly cautious over their real estate plans,” said Tay Huey Ying, head of Singapore research at JLL.

She added that office rents in the central region have now dropped by a total of 9% since the downtrend started in the second quarter of 2015.

Tay also noted that a key culprit behind the steady decline in office rents is the continual consolidation of banks due to higher costs associated with regulatory compliance, as well as the exposure to the slowing oil and gas sector.

Research from Colliers International show that office buildings in Premium Raffles Place/New Downtown registered the largest quarter-on-quarter drop of 6% in average monthly gross rents to $10.59 per sq ft in Q1.

For Grade A office buildings in both Raffles Place and Shenton Way, meanwhile, the average monthly gross rents declined 3.6% quarter-on-quarter to $9.50 per sq ft and $8.24 per sq ft, respectively.

"With the completion of Guoco Tower, DUO Tower and Marina One scheduled in 2016 and early 2017, office buildings in the CBD are likely to see more movements and rental adjustments," said Anthea To, Senior Associate Director of Research and Advisory at Colliers International.

“Further rental declines are anticipated going forward and occupiers are presented with opportunities and options with a strong pipeline to deliver record volume of new stock. Strategic renewals and rightsizing will be the focus of many occupiers in the next few months,” To added.

JLL’s Tay expects office rents to drop from 10 to 15% this year.

“Landlords are facing greater pressure to lower rents in this tenant-favourable market in order to maintain occupancy. Some have also been observed to be renewing tenants ahead of normal schedule and offering longer fitting-out periods to entice new tenants,” she said.

In order to minimize the damage from dropping rents, analysts note that landlords are rolling out various initiatives to keep vacancy rates in check.
“Landlords are already offering more generous incentive packages, such as longer rent-free periods and fit-out subsidies.