Strong net absorption of office space in first half of 2018

 In News

RENTALS as well as prices of office space in the central region of Singapore continued to climb in the second quarter, show latest government numbers.

Island-wide, net absorption of office space in the first half of this year has surpassed the annual figures of the past four years (2014 to 2017), according to JLL’s analysis of the the latest figures released by Urban Redevelopment Authority.

In the first six months of this year, net absorption of office space island-wide was 88,000 square metres, against 60,000 sq m in 2017, 27,000 sq m in 2016, 62,000 sq m in 2015 and 72,000 sq m in 2014.

Tay Huey Ying, JLL’s head of research and consultancy for Singapore, said: “Demand was boosted by tenants, especially large corporates such as Facebook and Mitsui OSK Lines, moving into the recently-completed developments such as Marina One and UIC Building. The continued expansions by co-working operators such as the opening of The Great Room in Ngee Ann City, Ucommune in Suntec Tower Two, and Distrii in Republic Plaza also gave H1 2018 net absorption a lift.”

Christine Li, Cushman & Wakefield senior director of research, highlighted that the tech sector continues its pace of expansion amid fierce competition in the e-commerce and ride-hailing sectors. “Lazada renewed and expanded its space by 3.6 times in AXA Tower, occupying about 109,000 sq ft in total.”

She also predicts further expansion by co-working operators – the other major office demand driver these days – as companies seek to boost employee efficiency by locating offices in a flexible workspace environment. “In addition, the current practice of landlords granting an exclusivity clause to serviced office and co-working operators may be phased out, and we could see multiple operators within the same building.”

Ms Li cites Suntec City as an example, where Arcc Offices, Centennial, Regus, Servcorp, Ucommune and WeWork, are all tenants. “This new development could help new operators in the flexible work space arena to secure more space in a variety of existing office buildings, and this will help to backfill some of the vacant space left behind by other corporate occupiers that have relocated to newer buildings.”

URA’s office rental index for the central region of Singapore rose 1.6 per cent in the second quarter of this year over the previous three months. There was 2.6 per cent increase in Q1, and Q2 also marks the fourth consecutive quarter-on-quarter rise in the index since it last bottomed in Q2 of 2017.

Cumulatively, the index has gained 9.4 per cent in four quarters.

JLL envisages that its CBD Grade A average office monthly gross rental value, which has climbed more than 15 per cent from the bottom of S$8.41 psf in Q1 2017 to S$9.71 psf by the end of Q2 2018, has room for further growth of at least 10 per cent over the next 12 months.

Rental growth could surprise on the upside if tightening supply is exacerbated by withdrawals of ageing stock for retrofitting and/or redevelopment.

“Thinning opportunities for relocation/expansion in the CBD, coupled with the continued uptick in rents, could spur some occupiers to consider relocating out of the CBD. This will help in Singapore’s drive to bring work closer to home,” said Ms Tay.

URA’s central region office price index rose 1.9 per cent quarter-on-quarter in Q2 2018 – a faster clip than the 1.3 per cent increase in the previous quarter.

Besides the two whole-building deals involving MYP Plaza in Cecil Street and Twenty Anson, which were transacted at almost S$3,000 psf and S$2,503 psf of net lettable area, respectively, record unit prices were set during Q2 2018 in at least three strata-titled office buildings in the CBD: The Octagon, Springleaf Tower and Samsung Hub.

“Investors’ optimism has been underpinned by the strong market fundamentals of steady demand and limited new supply, which should support the continued growth in office rents into the medium term,” said Ms Tay.

Going by URA’s figures, as at the end of Q2 2018, there was a total island-wide supply of about 725,000 sq m gross floor area (GFA) of office space in the pipeline, compared with the 791,000 sq m GFA in the previous quarter. The stock of office space rose 60,000 sq m NLA in Q2 2018, compared with the increase of 11,000 sq m NLA in the previous quarter.

The island-wide vacancy rate of office space dropped to 12.2 per cent as at the end of Q2 2018 from 12.5 per cent at end of Q1 2018.

Duncan White, Colliers International head of office services, said: “Leasing transactions picked up pace amid expectations of escalating market rents. We expect vacancy to continue tightening as the supply pipeline remains muted over the rest of 2018 and 2019, and hence advise occupiers to conduct early portfolio planning and bring forward impending lease reviews.”

Desmond Sim, CBRE’s head of research for Singapore and South-East Asia, noted that the medium-term office rental outlook remains positive especially for the Grade A segment. “Potential risks remain, particularly on the demand side, in light of recent escalations in trade disputes and the possible dampening effects on global economic growth. Both landlords and occupiers will need careful navigation through the next six to 12 months as the actual strength of the market is tested.”

The Business Times, 28 July 2018

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