Prime Office Rents Falling Amid Turmoil

Source : The Straits Times, Nov 6, 2008

Rates are back to levels a year ago as landlords act to keep tenants

AFTER rising steeply for several years, prime office rents are on the way down as landlords move to retain good tenants in uncertain economic times.

In the wake of the global financial crisis, which erupted in mid-September, these prime rents are now back to levels seen about 12 months ago.

They fell 5 per cent last month and could fall another 10 to 20 per cent over the next six months, according to consultancy Cushman & Wakefield.

Office rents in general started falling in the third quarter ended Sept 30, given the weaker economic outlook.

But the fall in net effective prime office rents was even more pronounced last month as landlords became more flexible in negotiating rents, experts said.

'It is almost as if it was the landlords who blinked first,' said managing director Douglas Dunkerley of Corporate Locations, which helps firms find office space.

'The reason we saw such a swift change is that landlords have gone out of their way to retain their current tenants who have lease renewals coming up over the next six months.'

He said the search firm is not seeing many 'distressed' relocations by tenants as many had moved to take advantage of cost-saving opportunities.

'But now, more landlords are recognising the market has changed and are determined to keep their tenants,' he said.

Latest estimates from Cushman & Wakefield show that gross prime office rents dropped 5 per cent from September to reach $14.05 per sq ft last month. This cut prime office rents to levels of a year ago, said its head of research services, Asia-Pacific, Mr Ang Choon Beng.

'The difference though is that a year ago, rents were being adjusted upwards every month and now rates are being adjusted downwards at almost the same speed,' said Mr Dunkerley.

Cushman & Wakefield already noted a quarter-on-quarter fall in prime office rents in the three months ended Sept 30 - a reversal from straight quarterly gains for more than four years prior to that.

The rent rises - which reached nearly 95 per cent a year in Raffles Place last year - slowed this year. Rents peaked around late August.

Government data also showed that office rents fell in the third quarter, though by a smaller 0.8 per cent. Knight Frank said earlier those figures reflected growing resistance by some tenants to renew leases at higher costs, given that the current economic uncertainty will impact business profits.

DTZ executive director Cheng Siow Ying said landlords are prepared to look at creative lease packages with rent-free periods so the effective rental rates are lower. Landlords have not had to give rent-free holidays in over two years, said Mr Dunkerley, adding that nearly every landlord cut asking rents last month.

But the market is generally more subdued now, with tenants in a wait- and-see mood, experts said.

Supply-wise, there are more choices now than just a few months ago, but the bulk of the fresh office space supply will come onstream from 2010. So, while the downward slide in office rents is expected to continue, the speed should slow temporarily till nearer to 2010, said Mr Dunkerley.

Still, Cushman's projection is for prime office rents to fall by up to 20 per cent in the next six months. 'Given the sharp run-up in prime office rentals over the past two years, we are circumspect about the current downward trend of prime office rentals,' said Mr Ang.

The rental moderation is 'ultimately healthy' for Singapore's long-term prospects as it lowers the overall cost of doing business here. The slide is also a signal to firms that the office rental market is efficient and can adjust quickly in a changing market, he said.

Mr Dunkerley is looking at a fall of possibly 20 to 30 per cent over the next 18 months, which would ensure Singapore remains an attractive business location and in good shape to compete with other major regional centres.