Office Rents Nearing Peak As Supply Increases: Report

Source : The Straits Times, June 27, 2008

Impact of US sub-prime crisis, Singapore's rising inflation and weaker growth curbing rentals

AFTER more than two years of relentless rises, Singapore's office rents look to be finally peaking as more supply comes on stream.

A CB Richard Ellis (CBRE) report said the impact of the United States sub-prime crisis, rising inflation in Singapore and more modest economic growth have dampened the office sector and slowed rent rises.

Prime office rents edged up 10 cents - just 0.6 per cent - in the second quarter to $16.10 per sq ft (psf) a month on average. The rise over the first half has been 7.3 per cent, way below the 'astounding 92.3 per cent' for the whole of last year, said CBRE.

CBRE executive director office services Moray Armstrong said: 'Our sense is that the natural ceiling is close at hand.'

While there is resistance over rents from a number of occupiers, an encouraging sign is that there are still many ongoing negotiations, he said.

'Selected buildings may achieve higher rents but across the board, rentals are as high as they can go.' These are top-grade properties with rents of over $20 psf - though it is believed they are mostly for small offices.

Rents of top office buildings rose 9.6 per cent in the first half compared with 96.5 per cent in the whole of last year. Such Grade A rents averaged $18.80 psf a month in the second quarter, up from $18.65 in the first period.

Cushman & Wakefield managing director Donald Han said it was only a matter of time before rents peaked as they rose too fast and too soon last year.

'However, while office rents may have peaked, they will probably stay at the current levels for the next 12 months given tight supply,' he said.

A supply shortage over the past two years has prompted firms to try various means to save space or costs.

Some companies, facing a doubling or tripling of rent when leases were due for renewal, moved out to more affordable spaces in suburban areas or industrial locations.

And the search for lower-cost space continues. There is, for example, said Mr Armstrong, heightened interest for upcoming space in the Alexandra and Harbourfront areas.

Mr Han added that rents are also facing limited upside as many companies already made expansion plans and arranged for extra space last year.

Citigroup agreed in a recent report, saying that slowing demand and decentralisation are likely to start putting downward pressure on both rental and capital values. It tipped office rents to fall 30 to 35 per cent.

According to CBRE, the vacancy of Grade A space - now 0.6 per cent - will remain tight as no new top-grade office developments will be completed before the second half of next year.

But there is some relief in sight.

The vacancy rate for fringe areas rose from 4.6 per cent to 7 per cent in the April to June quarter because of new completions such as VisionCrest and the refurbished 111 Somerset in the Orchard Road area.

The Government has also introduced transitional office sites to help ease the shortage.

There will be about 10.2 million sq ft of new space coming on stream between now and 2012, with the bulk likely to be ready in 2010 to 2011, said CBRE. About 63 per cent of this will be in Grade A properties in the core downtown area.

Still, the supply should be viewed in context with the strong take-up rate, said CBRE. About 22 per cent of known supply from now to 2012 has already been pre-committed.