Tech, co-working firms continue to drive CBD office demand
In 4Q2017, CBD premium and Grade-A gross effective rents rose 2.7% q-o-q to $8.21 psf per month. This is an accelerated growth from 3Q2017, which recorded a 0.6% q-o-q rise in effective rents. Average occupancy rates improved in tandem, rising 0.5 percentage point q-o-q to 91.9%.
Leasing activity in 4Q2017 comprised mainly relocations and expansions by small and medium-sized technology firms and professional services companies. Expansionary demand was a major driver in filling up new-builds as well as backfill space vacated by tenants moving to new locations.
Online travel company Agoda expanded its space in Guoco Tower to 9,375 sq ft; and Pure Storage, a flash storage manufacturer, leased 10,000 sq ft in the same building. Travel marketing tech player Sojern relocated from a serviced office to take up a 6,500 sq ft space in Republic Plaza. These expansionary dynamics reflect the continued growth sentiment of the technology sector, particularly the software, online services and cloud computing sub-segments.
Last year was rounded off with further net absorption of space by flexible workspace operators — co-working spaces and serviced offices — with deals in the Marina Bay-City Hall locality headlining 4Q2017. JustCo took up four retail floors totalling 57,000 sq ft in Marina Square. China-based flexible workspace operator Ucommune entered the CBD with the lease of 14,380 sq ft in Suntec Tower 2. US-based WeWork also announced a pre-commitment of 40,000 sq ft at the upcoming Funan mixed-use development, which is slated for completion in 2019.
Generally, 2017 was a continuation of 2016’s strong momentum in flexible workspace take-up. Total square footage across Singapore leased by flexible workspace providers grew 42% to 2.1 million sq ft in 2017, a remarkable expansion, given 2016’s already-impressive growth rate of 29%. Growth is expected to be healthy this year, albeit at a slightly curtailed rate of at least 25% y-o-y, as several flexible workspace operators are still searching for locations.
The Raffles Place/New Downtown premium micro-market registered the highest rental uplift (+6.6% q-o-q), on the back of robust demand and resilient occupancy rates, despite the large supply injection in 2017. Grade-A developments in the same micro-market enjoyed the positive spillover effect from the new premium builds, and saw the next sharpest prime rental increment (+2.9% q-o-q) in the CBD.
CBD premium and Grade-A average lease incentives offered by landlords were 5.9% of face rents in 4Q2017, equivalent to 2.1 months rent-free on a 36-month lease. This is a notable reduction from 6.8% (or 2.4 months rent-free) in 3Q2017.
Grade-A occupancy rates across Orchard Road, Beach Road and cityfringe and suburban locations rose, whereas lower-tier developments saw a corresponding decline in occupancy rates. For instance, Orchard Road Grade-A average occupancy rates improved 0.9ppt q-o-q to 93.4%; Grade-B properties in the same micro- market recorded a sizeable drop of -4.8ppt q-o-q to 89.7%.
Continued broadening of growth into the service sectors as well as modest supply pipelines in the short term should pave the way for the accelerated growth of rental rates of 10% to 12% this year, and a more moderate 3% to 5% in 2019. Rents may dip 4% in 2020 in anticipation of the large supply slated to come on-stream in 2021.
This article is an excerpt from Colliers’ Quarterly Singapore Office Report titled ‘Tailwinds into 2018’, dated Feb 6, 2018
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