Singapore Grade A Office Rentals Flat Again in a Mixed Market

Likely to be a pause in rental growth rather than reversal

Singapore, October 7, 2024 -- Singapore Core CBD (Grade A) office rental remained flat for a second consecutive quarter in Q3 2024, averaging S$11.95 psf/mth. This six-month pause follows a streak of 12 consecutive quarters of growth when rentals rose 14.9% over the period. This was mainly due to the sharp rise in supply, as the completion of IOI Central Boulevard Towers added 1.2 million square feet of prime office space in the CBD. 

David McKellar, Head of Office Services, Singapore at CBRE, explained, “We have observed some landlords that are carrying larger volumes of availability taking a more pragmatic view and prioritising occupancy over securing market leading rents. This approach has generated some relocation activity. On the flip side, we are still seeing competition for premium spaces in the best buildings, on high floors with unobstructed views and lift lobby frontage – in such cases tenants are willing to pay a premium over and above the typical Grade A average rent.” 

With IOI Central Boulevard Towers completed in Q3 2024 and approximately half of its office NLA formally committed, the Core CBD (Grade A) vacancy rate jumped to 7.8% this quarter, up from 3.6% at the beginning of 2024. This vacancy rate is the highest since Q3 2017, when it hit 8.4% following the introduction of Marina One’s nearly 2 million sq. ft. of prime office space to the market. 

Excluding IOI Central Boulevard Towers, however, the Core CBD (Grade A) vacancy rate would have remained relatively tight at 3-4%, a sign that available spaces for existing prime buildings in the CBD still remain healthy.

Tricia Song, Head of Research, Singapore and Southeast Asia at CBRE, added, “The reason rentals remain flat instead of falling is because there is supporting demand too. Businesses increasingly see a superior workplace environment as a way to attract and retain talent. Many of them, especially in sectors like legal, emerging tech, and professional services, are acting on this by relocating in large numbers to high-quality buildings in prime city centre locations.”

Mr McKellar attested to this observation by pointing out that among IOI Central Boulevard Towers’ committed and potential tenants, for half of them the move could be considered a flight-to-quality with a discernible upgrade in specifications.

Ms Song also notes that buildings in decentralised locations are seeing mixed fortunes. On one hand, we have seen healthy take-up rates of over 70% at the recently completed Labrador Tower, which has attracted many organisations joining the flight to quality, including industries like consumer and industrial products, transport, insurance, and government agencies. On the other hand, however, we have seen other buildings struggle and had to adjust rents downward in order to pre-emptively backfill upcoming vacancies and ensure spaces continue to be occupied.

Outlook
CBRE notes that with the current market conditions expected to be relatively soft in at least the near-term future, some new projects in the CBD have yet to register pre-commitments. While this could weigh down on rent expectations, there has been some relief in terms of supply injection, including the Shaw Tower redevelopment’s delayed completion from 2025 to 2026, and also the URA’s decision on the non-award of the Jurong Lake District master tender site.

Interest rates are expected to further decline, which could motivate some companies to invest in technology and resources, and pursue expansion. The effects will however not be immediate, and it could take some time before this translates to a noticeable increase in office space demand, particularly when capital expenditure costs for fit-outs remain elevated.

Recently, Amazon issued a global mandate for employees to return to the office five days a week. Many organisations are closely monitoring the response and impact of such a mandate while considering a similar move of their own. If more firms end up implementing a similar policy, overall demand for office space could increase, sparking a corresponding rise in demand and rents. This would, however, also take time, as leases are typically signed for three to five years, and existing space allocations are fixed until at least the next renewal. In Singapore, where real estate costs are relatively high, some companies might also continue to favour hybrid work arrangements to manage finances.

“While there may be some overhang of space in the next six to 12 months, in the longer term, we still expect growth in rents for Core CBD (Grade A) buildings to resume. This will be driven by a sustained, possibly even accelerated, flight-to-quality, as well as the limited upcoming new supply in the city centre”, Ms Song concluded.

About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm (based on 2023 revenue). The company has more than 130,000 employees (including Turner & Townsend employees) serving clients in more than 100 countries. CBRE serves a diverse range of clients with an integrated suite of services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.

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