Rising Rents Are Now A Business Challenge

Source : The Business Times, October 11, 2007

Demand and supply mismatch has caused office rentals in the CBD to skyrocket

OFFICE rentals in the Central Business District (CBD) have been climbing relentlessly as a result of the demand and supply mismatch. Conversion of buildings for residential use and the redevelopment of ageing office blocks such as Ocean Building and Overseas Union House further exacerbate the office supply crunch.

Office squeeze: The Marina Bay Financial Centre will only be ready in a few years' time, and the demand- supply imbalance is expected to continue till then

The high demand for office space, which is propelled by financial institutions and business services, continues to drastically outpace new supply. During the first half of this year, supply of office space decreased by about 290,000 sq ft due to the conversion of office space for other use. As a result, the market could not keep up with the 1.29 million sq ft of new demand.

The islandwide occupancy rate for office space rose to a 10-year high of 92 per cent, while Grade A office space in the CBD stood at an almost full occupancy rate of 99 per cent.

In a bid to ease the current office supply crunch, the government has came up with 'stop-gap supply-side' measures such as disallowing the conversion of office space for other uses until the end of 2009, releasing more land for office development under the Government Land Sales programme, as well as offering vacant government buildings for lease as offices.

As most of the major office developments such as Marina Bay Financial Centre (MBFC) will only be ready from 2009 onward, the demand-supply imbalance will continue for the time being. Rental hikes for better quality office space are expected.

Those that are feeling the heat are the smaller and medium-sized companies - both local and multinational corporations (MNCs). They have been leasing prime office space in the CBD area and are caught out by the spike in rentals. To them, coping with rising rentals represents a genuine business challenge.

Despite escalating rentals, foreign investment banks continue to snap up large office floor plates for expansion or relocation of their global operations hub. These financial institutions are eager to set up new offices in Singapore to meet the demands of Asia's unprecedented growth in wealth management. One example is Standard Chartered Bank, which signed one of Singapore's largest office-leasing deals in April. It leased about half a million sq ft of office space, equivalent to 24 floors at MBFC that is slated for completion in 2010.

Major office projects under development and expected to be up in the market in 2007 and 2008 include VisionCrest, Wilkie Edge, 200 Newton and Merrill Lynch Harbourfront, which is already fully leased.

Amid the current office property boom, one can still find cost-effective commercial rental options.

The Singapore Land Authority (SLA) has been releasing vacant state properties and putting them up for lease as offices. A few successful bidders have refurbished the existing sites for renting out to corporate office users. The current rental for these space ranges between $4.00 and $8.50 per sq ft (psf).

Closer to the CBD, 150 Cantonment Road and 341 River Valley Road are expected to be ready for occupation in the final quarter of this year. 150 Cantonment Road has a smaller floor plate of about 6,800 sq ft per floor, while 341 River Valley can cater to tenants which need floor plates of about 50,000 sq ft.

Another spot of interest is the former ITE Pasir Panjang site at 991 Alexandra Road. This site, largest of all the properties released by SLA, can be converted into eight modern low-rise office blocks ranging from one to four storeys and offices ranging from 5,000 sq ft to 41,000 sq ft. Capitalising on the size, the successful bidder, Richzone, plans to create a self-sufficient office environment, complete with cafe and gym, decorated with a lush landscape that is different from a typical city office. This property will be ready for occupation in the first quarter of 2008.

On the other hand, some companies have decided to renew their contracts at higher rents. To cope with expansion, they have to rearrange their office space by reducing the size of workstations and/or decreasing filing space.

Others opt for relocation, even though it is a less preferred choice, in which a number of them split their operations - the main office remains in the CBD while operation personnel are relocated to the fringe areas or regional centres.

Wrapping up, rising office rental is a by-product of a buoyant economy. Operating costs are certainly higher as a consequence but so are more opportunities to generate revenue. At the end of the day, the effects of the existing office supply crunch are only short-term and they will ease as developments begin to come on stream. In the meantime, companies can help themselves by exploring all possibilities, and the good news is that cost-effective rental options are not lacking.

This article is contributed by Knight Frank