Rental Growth Due To Tight Supply

Strong Office Rental Growth Due To Tight Supply

SINGAPORE – Market observers think that the robust office rental growth of 5.1 percent in Q4 2022 is due to a relatively tight office stock rather than buoyant office leasing demand, according to a report from The Business Times that was updated on Friday evening (27 January, SGT).

“Through 2022, the overall office stock has been declining. In fact, island-wide, 86,000 sq m (925,696 sq ft) was removed from the market in 2022, the first decline since 2007,” commented Edmund Tie’s Research Head Lam Chern Woon.

In addition, overall net new demand for office space in Singapore turned positive to 44,000 sq m (473,612 sq ft) in 2022 following two years of negative office demand.

However, market watchers pointed out that office space demand rose at a slower pace of 9,000 sq m (96,875 sq ft) in Q4 2022 after two straight quarters of growth to the tune of 24,000 sq m (258,334 sq ft).

Lam said the slowdown in the 4th quarter is due to some companies rightsizing their office space requirements.

Moreover, CBRE’s Research Head for Southeast Asia Tricia Song noted that the pace of rental growth for prime office properties in the Downtown Core and Orchard Road area moderated from the 5.6 percent quarterly gain seen in Q3 to 0.8 percent during the last quarter of 2022.

“This could be due to rightsizing activity and consolidations among selected tenants, resulting in a potential increase of office space available for lease.”

“Towards the end of 2022, CBRE Research observed that office leasing demand began to slow for the larger occupiers, especially those in the tech sector,” she added.

Edmund Tie’s Lam shared that demand for office space in Singapore in H1 2022 was primarily driven by the tech sector, but it has since slowed down. Yet, the coworking space segment and the financial sector picked up the slack towards the end of the year.

Tay Huey Ying, the Research Head at Jones Lang LaSalle (JLL) noted that an increasing number of office tenants had put their expansion and relocation plans on hold amidst rising macroeconomic headwinds that has begun to erode market confidence. As a result, office leasing volume and rental growth slowed in the last quarter, ending 5 consecutive quarters of accelerating quarterly rental growth in Singapore’s Grade A office market, as per the real estate consultancy’s data.

“Occupier caution that set in during Q4 2022 is likely to intensify in 2023 as the downcast global and domestic economic outlook is expected to weigh down sentiments. Leasing activity is projected to be dominated by renewals and rightsizing, while expansions will likely be confined to occupiers with immediate needs to accommodate the significant increase in headcounts in 2022 to cope with business growth.”

Given this scenario, Tay foresees a more subdued office leasing sector in 2023, and this is expected to “substantially ease upward pressure on rents”. In fact, JLL expects the gross effective monthly rents of Grade A CBD buildings it tracks would just edge up by under 1 percent for the whole of 2023 after a 9.4 percent increase in the prior year.

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