Occupancy costs fall in S’pore: CBRE

But survey finds Republic is world’s 9th most expensive office market

THE republic is still one of the most expensive places in the world to do business in, even though office occupancy costs here have dropped, the latest survey by CB Richard Ellis (CBRE) shows.

As in the firm’s previous survey in May, Singapore was the world’s ninth most expensive office market, though occupancy cost dropped to US$135.13 per square foot per year from US$139.31 in May.

In CBRE’s November 2007 survey, Singapore posted the world’s biggest 12-month increase in office occupancy costs. But in the May 2008 survey, it dropped to third place. And in the latest ranking, it is 13th.

Occupancy costs here rose 27.8 per cent in the 12 months to November 2008, down from 86 per cent in the 12 months to May 2008. CBRE’s chief global economist Raymond Torto said that globally the rate of change is generally slowing, and in some markets the pricing direction is down. ‘Our current perceptions are greatly affected by the current economic malaise.’ he said. ‘We tend to forget how fast rents and occupancy costs were rising over the past 12 months. The turn in rent trajectory will provide some relief to occupiers and angst to owners.’

Abu Dhabi in the United Arab Emirates (UAE) registered the fastest-growing office occupancy costs in CBRE’s November 2008 Survey. Costs there jumped 94.6 per cent in the past 12 months.

‘The rise in occupancy costs in the UAE has reflected market fundamentals – limited supply of quality office space and high demand from international firms, primarily law firms, financial institutions and real estate and construction companies planting a footprint in the UAE,’ CBRE said. Ho Chi Minh City in Vietnam, which registered the fastest-growing occupancy costs CBRE’s May 2008 ranking, fell to second spot in the latest survey. Costs there rose 51.4 per cent in the past 12 months.

London’s West End and Moscow remain the world’s two most expensive office markets. Hong Kong’s CBD, Tokyo’s Inner Central District and Mumbai’s Nariman Point round out the top five.

Business Times –  Nov 2008

Office capital values down 2-3% in Q3

 

Easing of potential supply expected as 30% of projects have yet to start

OFFICE capital values fell 2-3 per cent quarter on quarter in the third quarter of this year in areas such as Marina Centre and Anson Road/Tanjong Pagar as demand softened, according to a report released yesterday.

The report by DTZ also points out that some redevelopment projects in the pipeline, such as International Factors Building, Robinson Tower and Marina House, have been deferred and the space put back in the market for leasing.

‘There could be more delays in completion, or easing of potential supply, as construction on about 30 per cent of projects in potential supply has not commenced,’ it says.

As the government’s ban on redeveloping office buildings in the central area for different uses will be lifted by end-2009, DTZ believes some planned office projects could be redeveloped for other purposes.

The cutback in potential supply comes as the financial sector, which has been largely responsible for the spike in demand for office space in the past two years, scales back expansion plans.

Many occupiers have shelved expansion plans amid economic uncertainty and are renewing leases at existing premises to avoid relocation costs, said DTZ executive director Cheng Siow Ying.

‘Office occupiers have become more cautious, with many adopting a wait-and-see approach,’ she said. ‘While negotiations for space are still going on, they are taking longer to conclude.’

Average office rents peaked in Q3, with no rental growth during the quarter. Although most landlords are maintaining their asking prices, they are now more flexible with lease packaging, resulting in lower effective rents.

Many tenants continue to relocate to cheaper decentralised offices and converted state properties, while those that qualify for hi-tech industrial and business parks are relocating there, Ms Cheng said. As a result, the island-wide average office occupancy rate eased 0.6 of a percentage point quarter on quarter to 96.3 per cent in Q3.

On the other hand, demand for industrial space, particularly in business parks, remained healthy. Business park occupancy averaged 92.5 per cent in Q3, up 2 percentage points from Q2.

DTZ says how far the office market will fall depends largely on how the global financial crisis plays out. There could be an increase in office sub-letting if companies start consolidating their operations and rationalising their use of space, it says.

Business Times – 9 Oct 2008

Grade A office vacancy doubles to 1.2% in Q3

GRADE A office vacancy has doubled in the third quarter of 2008, rising from 0.6 per cent in the previous quarter to the current 1.2 per cent.

This is also the first time in eight quarters since Q3 2006 that Grade A office vacancy has risen above the one per cent mark.

CB Richard Ellis (CBRE) says market fundamentals have changed and sentiments have ‘deteriorated’ with pre-commitment rent levels likely to come under pressure.

CBRE executive director Moray Armstrong added: ‘There is an increase in vacancy as certain occupiers have relocated to less expensive cost options in lower grade and, or, decentralised locations.’

According to CBRE, office rents have also plateaued with both Grade A and prime office rents remaining static at $18.80 per square foot per month (psf pm) and $16.10 psf pm respectively.

CBRE had earlier anticipated rents would only soften beyond 2010. But with the events of the past few weeks, it now believes that the correction will be fast- forwarded to early 2009.

‘Landlords are adopting more reasonable asking rents, although in the immediate term occupiers will still face rentals that are at all-time highs. We will continue to monitor the trend over the next few months to see how swiftly the fast approaching new office supply allied with slowing demand will combine to bring down rents from today’s levels,’ added Mr Armstrong.

There were increases in vacancy rates for most micromarkets in the third quarter of 2008 – with the exception being Orchard Road, which saw a one percentage point drop in vacancy due to higher occupancy at the newly completed Visioncrest and at StarHub Centre.

Mr Armstrong said that occupiers are ‘understandably cautious’ given the challenging financial and economic environment, but he pointed out that a number of recently announced pre-commitments demonstrate that there is underlying confidence in Singapore’s relative position.

Still, he noted that many occupiers are also chasing lower costs and are relocating to decentralised locations, built-to-suit facilities and business park space.

CBRE estimates the confirmed new office supply over the next five years is now slightly higher at 10.64 million sq ft.

CBRE said the increase stemmed from increases in proposed net lettable area from developments under construction.

‘We do not consider this volume of supply excessive based on our estimated average annual demand of 1.6 million sq ft,’ said Mr Armstrong, highlighting that about 26 per cent of the new supply has already been pre-committed.

Mr Armstrong explained that the 1.6 million sq ft demand figure represents its projected five-year average office take-up level over the period 2008-2012.

He believes that this figure represents a realistic take-up figure that has factored in lower GDP going forward.

By comparison the past three-year average office take-up level was just under 2.2 million sq ft.

Business Times – 3 Oct 2008

Grade A office rents in CBD slide for first time in years

 

Average monthly rent at Raffles Place slips 1.4% to $17.64 psf in Q3

Grade A office rents in Singapore’s Central Business District (CBD) have declined for the first time since the office market troughed in 2004.

The average gross monthly Grade A rental value for the Raffles Place area slipped 1.4 per cent to $17.64 per square foot (psf) in the third quarter, from $17.89 psf in the preceding quarter, according to the latest data from Knight Frank.

The Suntec/Marina Centre/City Hall area led the declines in Grade A office rentals in Q3, with a 6.2 per cent quarter-on-quarter fall to $15.13 psf. In the Shenton Way/ Robinson Rd/Tanjong Pagar area, the drop was 2.8 per cent, followed by a 2.7 per cent decline along Orchard Road.

Knight Frank director (research and consultancy) Nicholas Mak said that he expects office rentals to continue declining by 14-19 per cent islandwide in the next 12 months (from current levels) as the global financial turmoil and possible mergers and acquisitions contribute to consolidation and reduction in office demand.

Giving her take on weakening office demand, DTZ executive director Ong Choon Fah said: ‘Most companies are in cost containment mode and would be looking for ways to manage the increase in their accommodation costs. There has also been quite a lot of leakage of CBD office demand to business parks and vacant state properties converted to offices.’

Mrs Ong reckoned that headline office rents may not come down much but noted that leasing incentives like rent-free periods have started to reappear. Agreeing, an analyst said: ‘Major landlords will try to maintain headline rents, because once rents come down, it affects their whole portfolio.’

Besides weaker demand for office space amid the financial turmoil, Knight Frank’s Mr Mak attributed the softening rentals in Q3 to the government’s efforts to increase office supply (including transitional office sites). ‘In addition, landlords are more cognisant of the substantial supply of office space that will be completed from 2010 and have become more realistic and flexible in their rental expectation when it comes to lease negotiations; they want to hold on to their tenants and maintain their buildings’ occupancy rates,’ Mr Mak said.

The fall in the average Grade A Raffles Place rental value in Q3 marks the first quarterly decline since Q2 2004. This incipient weakening follows a rapid escalation in office rentals over the past two years on the back of tightening supply and strong demand from occupiers, including global financial institutions expanding their operations in Singapore. Average Grade A Raffles Place rents surged 82 per cent last year and that was on top of the 67 per cent gain posted in 2006, according to Knight Frank.

But it’s a different story now. ‘Since Q1 2008, there appears to be a crack in the growth momentum for office demand in the Downtown Core area due to external factors such as the US sub-prime crisis that began in the second half of last year,’ said Mr Mak.

The slowdown in demand in the Downtown Core area – which includes the key office districts like Raffles Place/Marina Bay, Shenton Way and Marina Centre – and tapering off in rentals in Q3 does not come as a surprise, he adds. ‘The tenants in this area are primarily financial institutions, many of which had already completed their expansion or consolidation plans over the last 24 months and some are adopting a more cautious approach by putting any further expansion plans on hold,’ Mr Mak observed.

Knight Frank’s data showed that Grade B offices in Singapore also experienced downward pressure on rentals in Q3. The biggest fall was in the Orchard Road location, where the average rent decreased 7.8 per cent quarter-on-quarter to $10.70 psf a month in Q3. Raffles Place and Shenton Way/ Robinson Rd/Tanjong Pagar Grade B offices were less impacted by easing office rentals and dipped by 1.8 per cent and 2 per cent quarter-on-quarter respectively.

As a whole, offices in non-CBD locations also mirrored the general slowdown in rental in Q3. Rentals continued to weaken for the Beach Road/Middle Road area, with a 3.4 per cent quarter-on-quarter drop. Suburban areas too met a similar fate with quarter-on-quarter rental decreases ranging from 1-8 per cent.

Looking ahead, Knight Frank said that in the short term, the beleaguered financial markets are expected to lead to many firms either postponing their expansion plans or consolidating their space usage. Restructuring at some organisations could lead to sub-letting of excess space to ease cashflow problems.

Business Times – 29 Sep 2008