Singapore office rents inch up by 1.1% in 2023

CBD Grade A office rents are expected to decline by up to 3% this year.

Savills Research revealed a modest 1.1% increase in Singapore office rental rates in 2023, a smaller growth compared to 2.2% in 2022. This can be attributed to a tight market and major leases not expiring until 2025.

Data compiled by Savills also indicated that the vacancy rate of CBD Grade A offices dipped 0.4 of a percentage point (ppt) quarter-on-quarter (QoQ) to 6.7% in the fourth quarter. Overall, the vacancy rate of CBD Grade A offices rose 1.1 ppts in 2023. Even though vacancy levels have risen, the market is still tight and may remain until the larger new buildings come online this year.

2024 outlook for rental rates of CBD Grade A offices may adjust down 2-3% year-on-year (YoY)

Economic uncertainties and a lack of demand for large amounts of space have impacted the office leasing market. Previously the mainstay of new office demand, tech and social media companies continued to experience challenges with layoffs affecting the industry. Thus, without major tenants taking up additional spaces and a lack of fit-out budgets, the leasing market is likely to be mainly dominated by tenants renewing their leases.

The market will see a significant movement of tenants in 2025, when the leases of major space occupiers are due. However, landlords are expected to feel pressured in 2024, especially in the second half of the year. Vacancy rates are expected to increase with the completion of new buildings, with the largest development, IOI Central Boulevard Towers comprising a Net Lettable Area (NLA) of 1.26 million sq ft, coming online in the first half of 2024. Demand for top premium space, Grade AAA offices, remains strong and any rental pressure is likely to be felt in the sub-grade A and AA offices.

Vacancy rates to have mild impact on rental

In 2023, only Grade AA buildings recorded a 0.2 of a ppt YoY decline in vacancy rates, while Grade AAA and A buildings grew 2.7 ppts and 0.9 of a ppt respectively. Factors contributing to the increase were the inclusion of newly completed buildings such as Guoco Midtown and Hub Synergy Point, and a YoY rise in shadow space. For the second consecutive year, net demand for CBD Grade A offices remained positive in 2023, although at a slower rate of 370,000 sq ft compared to 593,000 sq ft in 2022.

With just one new building - IOI Central Boulevard Towers, on the way in 2024 and almost half of its 1.26 million sq ft (NLA) pre-committed, there is reduced pressure on rental rates for the sub-grade AAA CBD office market.

Alan Cheong, Executive Director, Research & Consultancy, Savills Singapore says, “Although there is quite a fair bit of new supply coming online in 2024, the market would still be able to hold up reasonably well, especially for our CBD sub-Grade AAA buildings. Any rental adjustments may come from buildings whose vacancy rates surpass 5% or some of the sub-grade A and AA buildings. However, the drop is likely to be mild. Overall, we believe that rents for the overall CBD Grade A offices may adjust down 2-3% YoY in 2024.”

Ashley Swan, Executive Director, Commercial, Savills Singapore adds, “Overall, we expect uncertain economic and geopolitical conditions continuing to weigh down the market over the next couple of quarters with an uptick of “shadow space” contributing to downward pressure. However, the office leasing market has generally shown its resilience (especially Grade AAA buildings) and this is likely to continue over the coming year leading to rents moderating only slightly.”