Net absorption for office space in 1Q2020 falls for first time in 11 straight quarters

SINGAPORE (EDGEPROP) - Net absorption for office space in 1Q2020 has contracted for the first time in 11 consecutive quarters, by 7,000 sq m (75,350 sq ft), marking a drastic turn from 4Q2019 when 30,000 sq m of office space was taken up.

Island-wide, the vacancy rate has risen to 11% in 1Q2020, from 10.5% in 4Q2019.

The rise in vacancy rates and weaker absorption have to do with an increase in office completions. In the quarter, there were 106,375 sq m of office space injected into the market – led primarily by the completion of works at Oxley @ Raffles and Woods Square. Other projects completed include HD 139, and the asset enhancement works at 55 Market Street.

A decline in prices was more pronounced – office prices in Singapore’s Central Region dropped 4% q-o-q in 1Q2020, falling for the third consecutive quarter and recording its steepest drop since 1Q2017. In particular, prices fell 3.7% q-o-q for the Central Area, and 5.6% q-o-q in the Fringe Area. The data, however, is not indicative of the impact on current sentiments as many of these transactions could have been committed before the Covid-19 pandemic, observe property consultants.

The impact of the pandemic on office rents has yet to be apparent – CBD Grade-A rents remained flat q-o-q at $10.09 psf per month in 1Q2020, compared with $10.81 psf per month in 4Q2019.

Further rent correction is to be expected. However, rates should be more contained than those seen during the Global Financial Crisis (GFC). Tay Huey Ying, head of research and consultancy at JLL Singapore, points to three factors.

First, the office market is currently not in a bubble, unlike during the GFC. Rents in the Central Region rose a moderate 13.6% over eight quarters from 2Q2017 to 2Q2019, whereas they spiralled up by 172% over 17 quarters prior to the GFC, from 1Q2004 to 2Q2008.

Second, the office market is currently seeing a moderate injection of new supply – there is an expected incoming supply of 603,000 sq m between 2Q2020 and 4Q2024, as compared to the supply during the GFC, which amounted to 1.529 million sq m between 2Q2008 and 4Q2012.

Construction delays due to “circuit breaker” measures could further ease supply over the next five years.

Third, the government’s relief measures to business could help contain the fallout from Covid-19.

Office leasing slows down

Unsurprisingly, leasing activity slowed in 1Q2020 as travel restrictions and safe distancing measures hampered viewings and negotiations. Those in the aviation, transport and travel-related industries also shelved expansion and relocation plans during the quarter, observes Tay.

Comparatively, renewal leases have shown more resilience as compared to new leasing demand. To that end, landlords have become more realistic in their expectation of rents, and are offering more incentives to entice lease renewal or attract new lease commitments, says Tay.

Should this continue, the gap in demand between rents for renewals and for new leases is expected to narrow, says Christine Li, head of research, Singapore and Southeast Asia, at Cushman & Wakefield (C&W).

Meanwhile, consolidation in the flexible workspace sector is expected. “Their initial advantage in catering to companies looking for flexible workspaces – to conduct split operations as part of their business continuity planning – amid the Covid-19 outbreak dissipated as working from home proved to be a superior option in containing the spread of the virus,” says Tay.

Looking ahead, the main demand driver for office space is forecast to be the technology sector, predicts Tricia Song, head of research for Singapore at Colliers International.

Grade-A and Premium CBD office vacancy of 3.1% is expected to continue to rise over the next few quarters with incoming supply, but remain below the 10-year historical average of 6.2% in 2020-2021 as the new supply is quite limited, she adds.

With Covid-19 disrupting working arrangements, C&W’s Li believes this will change the demand for office space in the long term. “Over time, with prevalent remote working in place, major occupiers’ footprints in the CBD office could shrink further. Meanwhile, there could be renewed interest in high-quality decentralised office and business park spaces to complement the CBD offices,” she says.

Source: EdgeProp, 24 April 2020