The largest decline of office rents was found in the private sector office space in the central region in Singapore (Photo: Albert Chua/The Edge Singapore)
SINGAPORE (EDGEPROP) - The pandemic has led to high retrenchment rates and an wider acceptance of working from home, which in turn have caused office rents to decline in 3Q2020, after holding firm in the previous quarter.
The largest decline was found in private sector office space in the central region, which declined 4.5% q-o-q. It is the greatest decline in 11 years since 2Q2009, says Christine Li, head of research (Singapore and Southeast Asia) at Cushman & Wakefield.
Tenants continued to downsize. “With rising vacancies, landlords had to drop rents more aggressively in order to source for tenants to backfill space vacated by companies relocating or downsizing,” says Cushman & Wakefield’s Li.
Year to date, the rental decline is about 5.3%, notes Desmond Sim, head of Research (Southeast Asia) at CBRE, although the rate was cushioned by the stimulus packages and rental relief schemes.
Office take-up rates have also remained sluggish. The amount of occupied office space decreased by 19,000 sq m in 3Q2020, compared to a decrease of 55,000 sq m (nett) in the previous quarter.
As key sectors such as business services and oil and gas underperform, and corporates adopt agile working arrangements without increasing real estate needs, office space is becoming under-utilised, says Li. However, she believes that medium- to long-term demand for office space will likely remain resilient.
Bright spots in the long term
As social distancing requirements necessitate safe distances between employees, companies will have to “de-densify” the workplace, leading to larger square footage per employee. This will compensate for the reduction of space needed due to telecommuting, says Li.
Additionally, the supply of office space in 2022 will be moderated due to construction delays caused by Covid-19. “2022 will only see about 36,000 sqm of office space coming on stream, a reduction from 250,000 sqm originally scheduled based on URA’s 2Q2020 statistics,” she adds. CBRE’s Sim concurs, noting that construction delays will allow “more time for demand and supply dynamics in the office market to re-calibrate”.
There has also been no new supply over the past three months due to a negative net supply of 33,000 sq m, led by the redevelopment of certain office buildings such as Shaw Tower. As a result, even with negative net absorption of 19,000 sq m this quarter, islandwide office vacancy rates eased only marginally from 12.1% in 2Q2020 to 12.0% in 3Q2020.
Leonard Tay, head of research at Knight Frank, observes that the redevelopment of ageing office buildings will also help to generate office-leasing demand in the months ahead. Other than Shaw Towers, Keppel Towers and Tower Fifteen, and more than 1.2 million sq ft of NLA from AXA Tower, Fuji Xerox Tower and potentially Central Mall in 2021, will be redeveloped.
Meanwhile, due to geopolitical tensions, several Chinese tech firms have taken up Grade A office space in Singapore, such as Alibaba, ByteDance and Tencent, says Li, which benefited Singapore’s office sector.
Despite dipping office rents, office owners are not in a hurry to dispose of assets at substantial discounts, due to low interest rates, Li notes. In fact, office prices have increased by 0.2% in 3Q2020 despite the recession, and one reason for that could be the influx of capital coming from stimulus packages introduced by global governments.
However, prices will become more realistic and trend downwards when “investment choices are made more in line with asset fundamentals”, says Li.
Knight Frank’s Tay predicts that office rents are expected to dip nearly 10%, within the projected range of 10% to 15% in 2020, followed by a more moderate 5% to 10% easing in 2021.