Demand for office space fairly robust with almost half a million sf taken up in Q2
In spite of weak economic growth prospects and ongoing challenges in the banking and finance sector, office demand in Q2 2012 beat expectations with stronger leasing performance and positive net absorption reaching 473,200 sf. A few occupiers have taken advantage of the relatively high availability of Grade A space at competitive rents and “flight to quality” has been a key feature.
Moray Armstrong, Executive Director, Office Services said “At the mid-year point the office market indicators are actually quite encouraging. Positive net absorption is well ahead of expectations and there has been a decent level of leasing activity of late. As anticipated, rents have been adjusting downwards, but the rate of correction is fairly modest. The down cycle in rents is likely to persist through the balance of the year, but the point at which rents reach a support level may not be that far away. There are a new entrants and new regional functions heading to Singapore which is encouraging.”
In overall terms there is still caution amongst large office occupiers and the absence of activity amongst the banks is a concern. Nonetheless given the better than- expected demand in the first half of the year and with positive net absorption of 1.06 million sf year to date, CBRE’s net absorption projection for full year 2012 has been revised upwards.
Both Grade A and Grade B office rents peaked in Q3 2011 and have been declining since, although at a markedly differing pace resulting in a narrowing gap between the two segments. In Q2, Grade A rents declined by 4.70 per cent to stand at S$10.10 psf/month, which represents a nine per cent decline since the peak. On the other hand, Grade B office rents have proved more resilient and fell by a mere 0.6 per cent over the past quarter and a 2.2 per cent decline since the peak. The relatively stable performance in Grade B rent is in large a measure of higher occupancy levels in Grade B buildings. By contrast the Grade A segment has had to absorb a high volume of vacant space, which has created a highly competitive leasing market and rents pressurised. Going forward, we foresee Grade B rents facing increased pressure from an additional 1.2 million sf second hand space released inthe next 18 months whilst Grade A rental declines are expected to ease.
Mr Armstrong added “Looking ahead, there is a limited pipeline of new office space between now and H1 2013. The mixed use project in Upper Pickering Street, opening in Q3 2012, includes a 70,000 sf office tower, which has been fully pre-let to AGC. Thereafter there are no new developments until H2 2013 when The Metropolis Tower 1 & 2 and Asia Square Tower 2 come in line.”
With stronger demand and no new space completed in Q2 2012, office vacancy rates declined. The trend was demonstrated across all submarkets and all building grades. The island-wide vacancy rate dropped by 89 basis points to reach 6.40 per cent. Core CBD recorded a vacancy rate of 8.40 per cent, a 90 basis points drop over the quarter but 146 basis point increase over the year. Going forward, however, the central locations (both Core and Fringe CBD) are likely to experience increasing vacancy rates as a high volume of second hand space will come ontothe market.
Neither CBRE nor its affiliated companies make any warranties or claims on the implied accuracy of the information contained herein.
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