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An Analysis of 2018 & A Forecast for 2019

Sunshine or snow, wind or rain, the Singapore office market loves all sort of weather and sustains through all naturally.

Nevertheless, it has been all sunshine with bright days for rental office market for quite some time, as it steps confidently into the new year.

Amid dark clouds of economic slowdown that looms large over the globe including the island nation, fresh opportunities created by certain segments has sustained the sunshine though.

Ecommerce, IT, Finance Companies joined by Business Centres offering flexible workspace and serviced offices have propelled the prime CBD Grade A office rental rates successively for the past three years.

The demand has been sustained partly also by the restricted supply of office space in this area.

Office spaces in new buildings with latest infrastructure became another driving factor for the quick increase of office rental rates in Grade A CBD offices.

The vacated buildings in turn were taken over to set up Business Centres with coworking spaces. Thus, it has been a win-win situation for both new and old buildings in CBD, propelling the rental rate in the meanwhile.

So, Property Experts have been undivided in their opinion that the new year 2019 would continue to witness increase in office rental rates while being slightly cautious to add that the pace might be slow.

Their strong feelings have the backup of URA statistics, which paints a positive picture of increase in office space rentals rates over the years along with a drop in vacancy rates.

URA’s statistics also compares the net demand of office space created over the years.

While 2017 data indicates 645,835 sf demand, the first three quarters of 2018 data aggregated to more than double that volume.

With 1.43 million sf estimated space caused by shift in occupied space, the demand for office rental space prevailed over the entire year of 2018.

The fuel for the demand was maintained by major Corporates migrating to new developments like Marine One and UIC Building while expanding Business Centres absorbed the vacancies left behind by them.

Office Rental Rates Keep Rising

JLL’s studies into the statistics reveal an astounding 20.8% increase in office rental rates step by step.

Q1-2017 has recorded an average rate of S$8.41 psf while Q4-2017 has recorded S$9.17 psf. At the finish of Q42018, the rate was S$ 10.16 psf. This also corresponds to the overall increase in percentage from 7.6% in 2017 to 10.8% in 2018.

JLL’s Head of Leasing, Chris Archibold strongly believes that this hike in office rental rates would, however, not hinder new business investments.

He finds the rates still very competitive when compared to other cities on the globe.

With conducive atmosphere for global investments, Singapore ranks only 13th among the expensive cities of the world.

He especially expects the IT sector to continue to play an important role in 2019, occupying rental office spaces and coworking spaces as well.

JLL’s Head of Research & Consultancy, Tay Huey Ying also foresees the continued increase of office rental rates into 2019 but predicts that certain limitations would hinder this growth to a considerable extent.

Ms. Ying further expects that major part would be played by ambitious Business Centre operators, who show great enthusiasm to grab their lion’ share in the office rental market.

More Space Needed

An analysis of URA TOP awards indicate that while 2018 created an office space of 216,000 sqm and 2020 is expected to create 201,000 sqm, only 49,000 sqm of space is expected to be created in 2019.

This indicates a clear case of short supply in new Grade A office rental space in CBD. Another cause of short supply could be attributed to renovation of recently acquired properties like Chevron House.

The renovation work deprives the availability of office rental space in buildings like this for a year. These are some caused that have propelled the office rental rates.

Parallelly, however, the redevelopments along the peripherals of CBD in the nearby districts are likely to lessen this demand and thereby keep the increase of CBD rental rates in check.

While around 260,000 sf of office space is already available from PLQ in Paya Lebar, more space would be created from Funan and Park Mall redevelopments in 2019.

Reflecting Archibold’s sentiments, Christine Li, Senior Director of Research, Cushman & Wakefield also believes that office rental market would continue to boom with the ever-increasing needs of the IT segment.

Transportation Network Companies are another thriving segment that are likely to propagate throughout the island in the new year 2019.

Ms Li is also keen to note the positive trends in US Fed Funds Rate. The benefited Financial Institutions are expected to establish their presence further, through increased spaces, adding more fuel to the office rental market.

Will Office Market Still Positive in 2019

Alan Cheong, Head Research, Savills Singapore places more emphasis on caution compared to his counterparts, who relish over the unprecedented growth in rental office market.

Their CBD Grade A rents have raised by 10% in 2018. Just like other experts, he forecasts a 8-10% raise in 2019 out of caution.

Mr. Cheong further strongly feels that since prices of a Company’s shares are often viewed as the benchmark for their financial health, the present market volatility could restrict global corporates from investing generously on commercial space.

Unless the situation changes for the better, he predicts the present trend of increasing rental rates to subside gradually.

The Market may feel that Business Centres offering coworking spaces are a relief to funded startups in the present business scenario. However, the net burn rate at which these funded startups operate might not sustain the business in the long run, although coworking allows them to be cost-effective.

Companies sailing through turbulent waters are another segment operating on cash burn models that keeps the office rental market at risk.

Meanwhile, many ambitious Business Centres are active on the verge of expanding their footprint in the industry through investments in commercial properties.

However, since they presently rely mostly on start-ups and low investment businesses with cash burn models, Mr. Cheong feels that the key decision-makers of these Centres might lose the enthusiasm in the days to come, as they do not have bright chances enough to get listed on stock exchange.

These are some concerns that cause Mr. Cheong to be anxious about the office market in the new year 2019, compared to his peers.

Nevertheless, he winds with a positive note that the short supply of office rental space in 2019 would balance the equation.

The high-spirited CBRE, honored by Euromoney as top agent for the fourth successive year, expects some positive returns even in the souring US-China trade relations.

Desmond Sim, Head of Research for Singapore and South East Asia foresees a ray of hope in the situation with production units being shifted to South East Asia and Regional Head Offices being established at Singapore, to keep the office rental market upbeat.

In recent times, some property tycoons have launched their own brand of Business Centres with flexible workspace and serviced offices or have supported such operators, vying and ensuring their share in the new business segment.

Mr. Sim views the trend of coworking spaces to spread from freelancers and start-ups to established corporates, with the availability of huge spaces promoted by these expanding operators.

In all, Mr. Sim believes that his Company’s average monthly Grade A core CBD rental value for 2019 would be around S$ 11.80 psf.

Since 2017, the rental values has grown incrementally from 3.3% to 14.9% in 2018. Nevertheless, he projects only 9.3% rise in 2019 being cautious of the predicted slowdown in rates.

Similar sentiment reverberates in Colliers International with its incremental average rental value from 2.3% in 2017 to 14.8% in 2018 and followed by a cautious forecast of 8-10% in 2019.

Head of Research for Singapore, Tricia Song has compiled from statistics that the year 2018 has witnessed around 1.8 million sf and the year 2017, around 2.7 million sf of office space requirements fulfilled.

Again, being cautious like other Property Experts, Ms. Song predicts requirement of 900,000 sf for 2019.

Its Head of Office Services, Duncan White sees more greenery in 2019 with multiple Government’s initiatives to aid growth of different industries, eventually resulting in growth of office rental market.

He also believes that the flex and core leasing model adapted by Business Centres would add more value to rental office market as it attracts more multinationals anchoring on work environments that have largely become digital and mobile in the recent times. The advantage of this segment lies in its strategic amalgamation of traditional long-term leases with short-term leases of coworking operators

All sunshine makes a desert. And rains mark the onset of a rainbow. In harmony with nature, there is never a short supply of success and hope in the Singapore office rental market.

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