A Good Time To Shop For Office Space

Source : The Business Times, March 26, 2009

What should tenants look out for in a market where prime rents slid 17.8% in the last quarter of 2008?

WE have barely turned the page on a turbulent 2008 and are already confronting a 2009 that is shaping up to be equally difficult. Indeed the unremitting flow of grim economic news in recent months has dashed hopes of a quick recovery. While the pain has been intense, there are signs that what we are currently feeling is the worst part of the downturn. Governments around the world have formulated strong stimulatory responses. We are hopeful that these actions will sow the seeds of a robust recovery for the global and Singapore economies.

Space to rent: 2 Havelock Road (the former Apollo Centre) has a typical floor plate of 25,000 sq ft

Mirroring the broader economic environment, Singapore's office market softened considerably towards the end of 2008. Statistics from the last quarter of 2008 indicated that we are firmly in a tenant's market.

Cushman & Wakefield (C&W) spot prime rents declined by a sharp 17.8 per cent in the last three months of 2008 to $12.20 per square foot per month while prime vacancy rates increased by 1.1 per cent to 3 per cent over the quarter. The rent drops were led by steep falls in our City Hall-Marina-Bugis and Orchard Road micro markets while the Raffles Place and Shenton Way micro markets fell by a comparatively smaller amount.

We believe that the sharp declines can be attributed partly to the decisive and pro-active response of landlords to the weakening external environment after the September 2008 financial market turbulence.

Moving into the new year, our January and February market read shows that the downward momentum in spot rents has not abated across all four of our micro markets. Our overall prime vacancy rate in February also crept up slightly to 4.25 per cent, a 1.25 percentage point increase from our fourth quarter 2008 figure.

As with the broader economy, we believe we are currently seeing the worst of the rent declines. As leasing activity picks up, we think rent declines will follow the contour of economic growth and show signs of moderation as we progress into the year.

Turning to supply, we expect a total of 2.4 million square feet of office supply this year and a further 2.6 million sq feet in 2010. A portion of the future supply has been pre-committed. However, some of the pre-committing tenants are either relocating from existing spaces or consolidating operations at the new sites. These pre-committing tenants will leave space behind in their wake.

On the flip side, we are also now forecasting potential deferments of up to four million sq ft of supply. The vast majority of our forecasted supply deferments were scheduled to come on stream between 2011 and 2013. This would potentially constrict new space choices for tenants starting from 2011. In aggregate, our latest projection calls for a total 7.8 million sq ft of office supply from 2009 to 2013.

Based on current trends, office rents are therefore likely to see meaningful declines in 2009 before alleviating in 2010. In the context of sharp rent increases in 2006 and 2007, these declines merely represent partial retracement of the gains made in those two years.

We also think that in view of our forecasts for a significantly lowered supply in 2011-2013, a more stable office market could emerge in 2011.

In the current tenants' market, what is our advice to tenants?

From a real estate perspective, this recession is good for tenants. Landlords are now more open to negotiations and prepared to offer concessions. This is, therefore, a good situation to be in for tenants currently looking for new space or renewing their leases. Nonetheless, we would temper rent expectations. Rent concessions would be provided primarily by landlords facing weaker take-ups or significant upcoming lease renewals.

A tenant wishing to take advantage of the situation must, therefore, be very flexible about location. This is usually not the case. Tenants typically have specific requirements which may justify accepting market or slightly above market rents. This is the reason why commercial real estate advisers usually undertake a detailed analysis of clients' business and business requirements to recommend optimal lease solutions.

Abundance of options

The other constraint that tenants face is timing. Leases that are negotiated for a certain time window would typically generate rents appropriate to those time windows.

The timing constraint also affects tenants whose lease expiries are happening next year but who are under pressure to cut costs immediately. We would suggest lease restructuring for these tenants. A mutually beneficial lease restructuring would see tenants receive immediate cost savings in exchange for providing landlords with greater certainty in the future.

Turning our attention to possible locations, we note that there will be an abundance of options for tenants in new and existing prime grade buildings both in the Central Area and outside it. Most of this space would be at very attractive rent rates compared to levels in 2007 or early 2008. It really is a good time for tenants to go shopping for office space.

Given the government's efforts to build up the Marina area as the new downtown, we think tenants looking for premium space should not ignore the Marina Bay Financial Centre development. But there are numerous other attractive options, each with its own unique selling points. We list a few below.

# 2 Havelock Road (the former Apollo Centre) is a mid-sized development with a typical floor plate of 25,000 sq ft and balconies on every floor.

# 51 Telok Ayer Street, a development converted from the former China Square Food Centre, has a crystal glass facade and a ceiling height of 3.2 metres, offering prime office space with a spacious feel.

# Mapletree Anson is a new development which is a two-minute walk from the Tanjong Pagar MRT station with nine-metre high lobbies.

# Another new development, Straits Trading Building, promises tenants exclusivity, with no more than two tenants per floor. Its location in Raffles Place is another key attraction.

Besides the non-exhaustive list of new buildings highlighted here, we also see many space options opening up in existing buildings. Apart from the usual turnover of tenants, a new source of space in the current climate is coming from existing tenants sub-letting space that they may have over-committed to in better times.

Overall, we advise tenants to adopt a longer-term strategic view and take this opportunity to plan their real estate needs in anticipation of the recovery that will inevitably happen.

Ang Choon Beng is Cushman & Wakefield's director, head of research services (Asia- Pacific); Kelvin Chiang is C&W's associate director, tenant strategies & solutions, transaction services; and Lee Peiying is C&W's research analyst (Singapore)