Grade A CBD office rents improved by 0.2% quarter-on-quarter to $9.59 psf in Q1/2023
Savills Research reports that the net take-up for CBD Grade A office spaces contracted by about 471,000 sqft in Q1 2023. As a result, the overall vacancy rate of CBD grade A offices rose 1.7 percentage points (ppts) to 7.4%. This is the second straight quarter’s increase for vacancy, despite the considerable number of leasing enquiries with office sizes mostly in the range of 3,000 to 7,000 sq ft.
Quarterly increases in vacancy rates were broad-based by grade. Within Savills’ CBD Grade A basket, there are subgroups - AAA, AA, and A. Subgroup A buildings saw the greatest rise of 2.1 ppts to 8.9%, immediately followed by Subgroup AA which increased 2.0% to 7.7%. Subgroup AAA offices’ vacancy was 5.5% in Q1/2023, reflecting a relatively moderated increase of 1.2 ppts quarter-on-quarter (QoQ).
The top two micro-markets that saw the highest quarterly growth in vacancy rates were Tanjong Pagar, an increase from 6.7% in Q4/2022 to 12.6% in Q1/2023 (up by 5.9 ppts), and Raffles Place, from 6.0% in Q4/2022 to 9.1% in Q1/2023 (increase by 3.1 ppts). For Tanjong Pagar, the hike came mainly from the unfilled space in the newly completed Hub Synergy Point.
Other than the City Hall and Orchard Road areas, where the vacancy rates inched down 0.3 and 0.5 of a percentage point (ppt) respectively, other micro-markets (including Marina Bay, Shenton Way and Beach Road/Middle Road) posted a quarterly vacancy increase from 0.9% to 2.0%.
However, the rental spike is tapering off as average monthly rates of CBD Grade A offices edged up 0.2% QoQ to S$9.59 psf in Q1/2023, compared to the 0.6% QoQ in Q4/2022. Global economic uncertainties and influx of shadow space caused by tech-sector meltdown and business restructuring have formed obstacles for further rental increases.
By grade, the Subgroup AAA office sector had the highest rental growth at
0.4% QoQ, followed by both Subgroup AA and Subgroup A with a 0.1% quarterly increase.
By location, positive QoQ rental increases were observed in Raffles Place (1.1%), and Beach Road/Middle Road (0.5%). Office rents in City Hall, Tanjong Pagar, and Orchard Road remained unchanged from a quarter ago. (Please refer to Table 1)
The CBD Grade A office market is at the crossroads, facing several possible paths which it can take for the next decade. While economic challenges continue to increase and the tech sector, which is believed to be the driver of office space demand, faces more funding troubles, rents are still rising, albeit at a pedestrian pace.
Beyond this, the green and greener movement plus other sustainability and wellness issues arise for both landlords and tenants. Juxtaposed with the above issues is also the adoption of hybrid working for many industries. All these are new confounding factors that the office market has to grapple with, likely rendering the market structure of the past 15 years almost irrelevant.
Alan Cheong, Executive Director of Research at Savills Singapore says, “Moving forward, the world is now being impacted by many more factors. How the office market may pan out for the rest of this decade in this paradigm where there are superpower tensions, a medium-term affliction of high inflation and interest rates, hybrid working, sustainability and wellness scoring and lastly, the rapid adoption of Artificial General Intelligence (AGI) is not only not easily modelled but impossible to do so.”
“The upshot from this is that we cannot make a forecast based on the past because of the myriad of macro interventions. We have to start from scratch. Nevertheless, office rents here can still find support only if the supply of Grade A space in the CBD is constrained.”
Marcus Loo, CEO, Savills Singapore says, “The Singapore office market remains resilient in the fact of economic challenges. The key rental supports arise from the relatively low supply of new Grade A CBD office space in 2023 and also landlords’ strong holding power in the face of increasing vacancy levels. Such rental resilience will be robustly tested moving forward as we see more corporations right sizing amidst rise in shadow space.”
For 2023, Savills maintains the projected 2% YoY growth for Grade A CBD office rents with vacancy levels hovering at around 7% to less than 8%.
Savills Research provides in-depth analysis of property market trends, forecasts from our professional research team and market commentary to help you make the right property decisions.
Find out more in the Office Briefing for Q1 2023 here.