What is the two-tier market now forming in Singapore’s office sector?

Landlords are bullish about the rental trajectory in one of the two tiers. 

Demand for office spaces in Singapore is finally starting to pick up again. According to Savills, the main demand driver remains technology firms, such as ByteDance, with ongoing expansion plans as the firm is reportedly taking up space at Capital Tower after occupying significant pockets of space at One Raffles Quay and Guoco Tower. 

Interestingly for other firms, instead of downsizing, the prevalent expectation last year, some have embarked on modest expansions. For others, many are still contemplating adopting hybrid work arrangements. At this juncture, these companies have not yet decided on what form they will adopt and will need more time to craft plans. 

Here’s more from Savills:

With more staff able to return to their workplaces, co-working spaces are also picking up and there are more enquiries for such spaces. Among these, many are enterprise solutions, which provide companies with customised office space to fit their business needs with flexibility, while deciding on any future long-term spatial needs. For co-working operators, many of them continue to hold management contracts with landlords of buildings instead of taking up leases themselves. 

A two-tier market appears to be forming. On one hand, the premium, high-specification buildings continue to perform well where vacancy rates remain tight, and landlords hold a bullish view about the rental trajectory. These are also the buildings largely favoured by technology firms and with the limited potential supply of such buildings (until the completion of Guoco Midtown in late Q4/2022 and IOI Central Boulevard Towers in late-2023), any vacant space in the CBD Grade A buildings which enters the market has been absorbed relatively quickly. 

On the other hand, older buildings continue to face vacancy pressures and if this persists, it may lead the owners of such buildings to either upgrade or redevelop them. It is this potential withdrawal of stock from the market which should keep rents high in the foreseeable future. 

With the improving leasing market and a gradual renormalisation of economic activity, buying interest in office assets remains high with investors favouring quality assets in prime CBD locations. In the first quarter, there were five block transactions four of which were in the CBD. 

Of the four the two office buildings are 79 Robinson Road (sold for S$1.26 billion) and Cross Street Exchange (sold for S$810.8 million). The largest office investment deal in Q1/2022 was the acquisition of the remaining 68.2% stake in Jem by Lendlease Global Commercial Reit for around S$1.42 billion.