Office vacancies hit four-year high in 3Q

Blame it on a 60% drop in  hiring.

The prolonged slowdown in the services sector resulted in higher labour redundancies and weighed down demand for offices, as occupiers took a wait-and-see attitude towards expansion plans, said Cushman & Wakefield (C&W).

According to the research house, office-using employment (ie net employment growth in the financial and insurance sector, business services and infocomm) continued to stagnate with an increase of just 1,300 workers in the second quarter, a drop from the 3,600 workers added in the first quarter.

As such, office rental index continued to soften, falling by 1.1% Q-o-Q in 3Q2016.

Vacancy rate for islandwide all grades spiked to 10.4% in 3Q2016, up from 9.1% in the previous quarter. This is the highest vacancy rate in 4 years since the onset of Eurozone crisis in 2Q2012.

Going forward, C&W cautioned that with the completion of another 879,000 sqm of GFA of office space in the pipeline, vacancy rates for islandwide all grades could possibly test the high of 13% in last 10 years, but is unlikely to reach the record high level of 17.9% during SARS. The highest vacancy rate of 13% in the last 10 years happened in 3Q2010.

On the positive note, despite cautious business sentiment, pre-commitment rates in the new projects have significantly exceeded prior expectations, supported by take-up from a wide range of sectors including banking & financial services, technology, and professional services, who saw reduced rents as an opportunity to relocate and lock in attractive rentals which matched their affordability.

Meanwhile, activities from new office tenants remained muted.

Leasing activity in the new projects continued at a steady pace during the third quarter. Guoco Tower was reported to be close to 80% leased prior to obtaining its Temporary Occupation Permit (TOP) in September, a notable improvement from its pre-commitment rate of 18% in the first quarter. New tenants signed during the third quarter include Palo Alto Networks and Amadeus which leased 36,000 square feet (sf) each, and Itochu Singapore which took up 28,000 sf.

Meanwhile, Marina One’s pre-commitment rate also rose to 35% ahead of its revised completion date in the first quarter of 2017. Swiss bank Julius Baer, PwC and BTMU were some of the early movers.

According to C&W, given the flight-to-quality movement only benefits newer developments at the expense of older buildings, landlords of non-grade A buildings are now more open to negotiations with longer rent holidays and rent free fitout periods in order to retain and attract new demand to backfill the space freed up by outgoing tenants.

Going forward, C&W believes that office rents will remain under pressure in the absence of a recovery in local economic growth.

Singapore’s advance estimates of 3Q GDP at only 0.6% Y-o-Y growth surprised market expectations on the downside, as both the manufacturing and services sectors pulled back.

However, we expect the degree of rental moderation to ease next year given the strong take-up of new projects and the significantly reduced supply pipeline after the first quarter of 2017.