Office Rentals to Hold Steady Amid Tight Supply of Space

 By Wong Siew Ying

The Singapore office leasing market is still alive and well post-pandemic. Bold predictions that the Covid-19 pandemic - which drove employees to work from home en masse – will lead to a demise of physical workspaces never did materialise.

While many companies have retained some form of remote working set-up, the physical office space continues to be important and relevant to facilitate collaborative work and foster corporate culture.

The extensive easing of pandemic measures in 2022 saw a strong recovery in the office leasing market, with rentals for office space in the Central Region climbing by 11.7% in 2022, following a 1.9% increase in 2021, according to the Urban Redevelopment Authority’s office rental index.

In Q1 2023, office rentals rose by 5.1% QOQ, building on a similar pace of rental increase in the previous quarter. The rental growth in Q1 2023 is the sixth straight quarter of increase, and the office rental index has recovered to pre-pandemic levels since Q4 2022 (see Chart 1). In fact, the 5.1% QOQ growth in each of Q4 2022 and Q1 2023 is the largest quarterly jump since Q1 2011, where office rentals rose by 5.4% QOQ.

Singapore’s transition to living with endemic Covid-19, the return to office push, and reopening optimism helped to fuel the office market recovery. Consequently, the improvement in business confidence, coupled with the tight supply of office space put upward pressure on office rentals.

Office leasing market performance in Q1 2023
Despite the weaker economic growth outlook and uncertainties in the market – arising from a spate of global tech-layoffs in the end of 2022, and the banking sector turmoil in the West in March 2023 – the office leasing activity in Singapore was healthy in Q1 2023.

According to URA Realis data, 1,828 office rental contracts were signed in Q1 2023 – the highest number on record since Q4 1999. The leasing demand in Q1 2023 has strengthened with the number of contracts rising by 19% QOQ from 1,535 in Q4 2022, and up by nearly 18% from 1,553 contracts in Q1 2022.

In tandem with the robust demand, the total value of office rental transactions hit a fresh high to about $61 million in Q1 2023 – surging by 73% from $35.2 million in the prior quarter. On a year-on-year basis, the rental value was up by 68% from $36 million in Q1 2022 (see Chart 2).

The limited supply completion of quality office space in the city, with two projects coming up (Guoco Midtown in Bugis area, and IOI Central Boulevard Tower near Raffles Quay), as well as the tight vacancy rate should help to support prime office rents in the near-term.

Figures from the URA showed that the office vacancy rate tightened marginally from 11.3% in Q4 2022 to 11.2% in Q1 2023. It is likely that vacancies will remain low owing to the limited upcoming office stock and healthy pre-commitment at new-builds. A DBS report noted that Guoco Midtown (which obtained its TOP in January 2023) has achieved a pre-commitment rate of about 80%, while Central Boulevard Tower, which is expected to be completed by end-2023 or in 2024 already has 30% of the space committed to Amazon.

An injection of fresh office supply tends to spark flight to quality where occupiers may opt to relocate their premises to more central locations, or to higher quality buildings. Such vacated spaces, along with the emergence of some shadow space – as some companies right-size their operations or adjust their space needs due to flexible work arrangements - will present office occupiers with opportunities to upgrade to better office buildings in more attractive locations.

Assessing selected locations in the central business district and downtown core, URA Realis data showed that median monthly rentals have generally held up. Marina View and Shenton Way each saw a more than 18% QOQ growth in median rent, followed by Marina Boulevard where median rent rose by nearly 14% QOQ in Q1 2023. Meanwhile, marginal dips were observed in Collyer Quay and Raffles Place. Market Street witnessed a slightly bigger decline of 5.5% QOQ in median rents, but this could be due to the thinner rental volume during the quarter compared to other locations (see Table 1).

Market outlook
PropNex expects office leasing demand could track alongside economic growth trend, and the tight supply pipeline will help to support rentals, leading to a more moderate pace of office rental growth in 2023. The withdrawal of space from the redevelopment of older buildings in the city – tapping on the URA’s CBD Incentive Scheme – has also helped to support office demand and rents.

The supply of new space will remain limited over the next couple of years amid the redevelopment of some existing office building, such as Clifford Centre, Keppel Towers, and 333 North Bridge Road. According to URA figures, about 178,000 sq m (gross) of office space could be completed in the remaining 9 months of 2023. Another 179,000 sq m of space is in the pipeline in 2024, and the supply drops to 107,000 sq m and 44,000 sq m in 2025 and 2026 respectively.

Global macroeconomic headwinds and geopolitical tensions are expected to have an impact on commercial space leasing decisions. Singapore, however, remains an attractive destination for businesses, including multinational corporations, and family offices and wealth managers owing to the country’s stable political landscape, good infrastructure, pro-business policies, and talent pool. A case in point, despite the uncertainties in 2022, Singapore attracted a record $22.5 billion in fixed asset investments, driven by the electronics sector.

Meanwhile, in spite of the recent upheavals in the tech sector and banking stresses in the US and Europe (e.g. collapse of the Silicon Valley Bank and take-over of Credit Suisse by UBS), Singapore’s financial system remains sound and demand for tech talent is still healthy. However, given the office sector’s substantial exposure to the financial services and tech industries, any serious downturn in these industries could affect the Singapore office segment.

PropNex, which is working with several landlords, has a portfolio of commercial space that are available. Speak to the PropNex’s Commercial leasing team on your space leasing needs today.

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