Here’s what really made Singapore CBD office rents rise in 2022

It was not because of increased demand.

At the onset of Q4/2022, the impact of what had transpired in the cryptocurrency, technology and real economy sectors was leaching through to the office market, according to Savills Head of Research & Consultancy Alan Cheong. 

“Market chatter of companies relocating from HK to Singapore began to fade and was replaced by questions of what would happen to the space taken up by technology, crypto and social media (collectively ‘tech’) companies. Surprisingly, for Grade A CBD office rents, the impact is still not evident and in fact, rents in Q4/2022 increased at a faster rate,” he added.

Here’s more from Savills:

In the first three months of 2022, the office market was driven by social media companies and crypto related unicorns (private companies with a valuation of over US$1 billion) either aggressively expanding their footprint here or breaking out from co-working locations to find private office space.

While news of tech demand concentrated on just one name, which accounted for a large slice of new or replacement demand, there was a long list of companies in the crypto space which, after obtaining Series B funding, decided to take on private office leases rather than occupying co-working space. Linked to the demand from the smaller tech companies was the explosion of family offices which took up Grade A CBD office space. 

What made Grade A CBD office rents rise in 2022 was not any major demand expansion but rather a lack of new completions. On the demand side, a panoply of tech-social media companies and family offices in Q1/2022, tended to take up 3,000 sq ft to 5,000 sq ft units.

Although total demand for Grade A CBD office space in 2022 is estimated at about 600,000 sq ft, below the 2010 to 2019 average of 1.2 million sq ft, the low supply numbers gave a key boost to rents. Supply in 2022 was just 635,000 sq ft, well below the 2010 to 2019 average of 1.17 million sq ft. 

At the start of Q4/2022 the market began to see the emergence of shadow space. However, this had not yet influenced CDB Grade A office rents. The space signed on earlier by tech companies and family offices had soaked up vacancies to very low levels, giving landlords an opportunity to raise rents because of the limited supply and to cover rising expenses due to inflation. Looking ahead to 2023, more landlords are expected to raise their conservancy charges, and this may lend support to gross rents. 

Aside from the inflation drive, there is also an environmental aspect. Although tenants are operating in a tougher business environment, multinationals, who have to abide by the dictates of their head office green standards, may have no choice but to either renew leases in Grade A offices, most of which have at least a minimum Green rating, or relocate from non-Green to Grade A offices. The increasing density of smaller space users needing to move into Green buildings may mitigate the challenging business conditions tenants face. 

We are forecasting a 2% YoY rental increase for Grade A CBD office space in 2023, slightly down from the 2.2% in 2022.