Singapore office market still mired in uncertainties

CBD Grade A office rents may settle at a lower baseline, says Savills.

Grade A CBD offices saw occupancy levels decline from 94.3% in Q2/2020 to 93% in Q3/2020 due in part to tenants giving up shadow space upon lease renewals or pre-termination arising out of business closures.

Although 50% of a company’s workforce may now return to the office, in most sectors that occupy space in the CBD many offices have just 30% of their headcount back. Those who have to return have been broken up to work from alternate locations, leading to an increasing demand for regional office space, which unfortunately is of limited supply.

Tenants are still uncertain of their headcount requirements for 2021 and 2022 and with the northern hemisphere entering a winter lockdown, many are deferring their corporate real estate plans until spring.

For those whose leases are due to expire soon, they would renew on a short-term basis of one to two years instead of the typical three to five years. Landlords have become more accommodating in recent weeks and are agreeing to short-term lease renewals.

Owing to construction stopping for six months, new supply has been delayed, helping to shore up near-term rents. We believe there will be further completion timeline hiccups as construction workers, many of whom are from abroad, have expressed the wish to return to their home countries.

The landscape of CBD Grade A offices moving forward will be one where rents may settle at a new baseline, likely to be lower, and we may see a higher normal vacancy rate in buildings. At this juncture, the market is still mired in uncertainties, although we detect some light at the end of the tunnel next spring. However, we suspect the colour and intensity of light has changed.

What advice would Savills give a 30,000 sq ft CBD occupier with a lease event in 12 months’ time?

Wait until March next year when the market is expected to face greater consolidative pressures and then return to the landlord to ask for better terms. Rents in Singapore have yet to show significant declines.

At the moment, landlords have been slow to adjust rents down and if one rushes to lock in the renewal rents with 12 months to go, it would be difficult to justify to the head office why the discount is small when rents elsewhere have fallen sharply.