Singapore Office Rents Impacted By Prior Downturns
SINGAPORE – A study by National University of Singapore’s (NUS) Institute of Real Estate and Urban Studies (IREUS) revealed that office rents in the city-state’s Central Region were significantly affected during the last three economic downturns, reported The Business Times on Thursday evening (30 June, SGT).
Notably, the market drops lasted longer than overall recessions and office rents slumped by about 30 percent as compared to the period before the recession. Occupancy levels of office space in Singapore’s Central Region also fell by 4.2 to 7.0 percentage points during these downturns.
“During the Asian Financial Crisis, Dot-com bust and the Global Financial Crisis, many firms needed to reduce their physical footprint to cut costs, especially if they contract in scale. This led to the returning of spaces to landlords, who in turn reduced the rents to fill the spaces. However, demand also took time to respond to market recovery, and therefore the decline in rents tended to stretch longer,” said Lee Nai Jia, Deputy Director at IREUS.
“While office rents appear to operate independently of economic fundamentals during good times, they respond to economic contraction in a similar manner as other variables like manufacturing output and employment,” stated the institute in its report.
Nonetheless, based on historical data, there is little correlation between the office rents in the Central Region and Singapore’s gross domestic product (GDP). This is because office tenants are unlikely to quickly downsize their office space in response to an economic recession, as they tend to be locked in 3- to 5-year leases.
Furthermore, office stock is often inelastic, and when new office premises become available in the market, the space doesn’t launch gradually in accordance with demand, but in significant and one-off amounts, like when a new office tower is completed.
Consequently, office rental rates are determined by the availability of existing office supply. For instance, the launch of Marina One Tower and DUO in 2013 triggered a flight-to-quality. In turn, this dragged down office rents in nine straight quarters, even though Singapore’s economy improved during that period.
