Gap Between CBD Grade A, Grade B Office Rents

Gap Between CBD Grade A, Grade B Office Rents Widens Further

SINGAPORE – The premium commanded by Grade A office rents in the city-state’s central business district (CBD) increased further as compared to that of its Grade B counterparts, according to an article written by Colliers International that was published on The Business Times on Thursday morning (16 September, SGT).

“The rental gap between the 2 market segments has been widening in recent years from 12.2 percent in 2015 to the current 18.2 percent,” according to an article jointly written by Shirley Wong and June Chua. The former is Colliers International’s Senior Associate Director Of Research, while Chua is Head of tenant representation in Singapore.

One reason for the growing gap is that monthly rents of Grade A space in Singapore’s CBD were more resilient. In fact, it only dipped by 0.5 percent to S$9.52 psf during the first half of the year, while the rents of Grade B offices in the same area declined 0.9 percent to S$7.79 psf.

Another factor posited by the duo is the robust growth of the flexible workspaces here could be propelling demand for Grade A office space in the CBD.

“Even before the COVID-19 pandemic, Singapore’s total island-wide flexible workspace within the commercial sector had already been posting annual double-digit growth since 2015, or a 31 percent compounded annual growth rate (CAGR).”

“Net lettable area (NLA) of flexible workspace tripled, placing it among the CBD’s top six occupier sectors by 2019, and accounting for 5 percent of CBD Grade A occupied space. Most of these new flexible-work centres are located within Grade A space in the financial district, and accounted for the bulk of net office absorption in recent years,” said Wong and Chua.

The duo expects island-wide flexible workspace within the commercial properties to increase by an additional 3 percent by NLA to hit 3.6 million sq ft amidst a recovery in 2021.

On the other hand, demand for Grade B office space remains sluggish, with some lessors struggling to backfill the vacant supply in these older buildings. Moreover, such commercial properties come with smaller floor plates than Grade A offices, and there is more available stock of smaller office suites. As such, tenants looking for such premises have more choices.

Consequently, the vacancy rate of Grade B office space in Singapore’s CBD increased by 90 basis points to 9.3 percent in H1 2021, while that of its Grade A counterparts rose 40 basis points to 5.6 percent due to lower occupancy of older buildings in Raffles Place/New Downtown.

“However, despite the higher vacancies, we note that selective landlords are still asking for higher rents for their Grade A offices, given the limited availability of large, premium contiguous space,” they noted.

Looking ahead, the duo foresees that CBD office rents in Singapore would rebound and increase in H2 2021, but there would likely be a two-tier recovery for the Grade A and B segments.

“We forecast Grade A rents to rise 2 percent in 2021, supported by strong economic growth, tech sector expansion and tight supply, while Grade B rents are likely to lag behind,” added Wong and Chua.

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