Prime Office Rentals at Basement Prices for Now

Source: Business Times – 7 December 2012

The best office space in town currently commands just a shade more rental than the rest. But this won’t last.

The rental gap between Grade A offices and Grade B office space islandwide has narrowed this year. Rents in older buildings at prime locations have held up as their occupancy levels remain stubbornly high. This is expected to change next year when tenants move into new developments and more space emerges in older buildings.

CBRE executive director (office services) Moray Armstrong highlights the “potential for a flight to quality as tenants realise just how attractively pitched rents are for Grade A office space”.

Data from CBRE shows that the average monthly rental value in its Grade A basket – which covers the best-quality buildings in Raffles Place, Marina Bay and Marina Centre – is likely to end the year at about $9.51 per square foot (psf), from $11 psf in Q4 last year. This reflects a full-year drop of 13.5 per cent.

On the other hand, the rent decline for Grade B offices islandwide – which refer to older, smaller or lower-specification office blocks – will be much smaller, at about 2.3 per cent this year. The average monthly rent is expected to dip from $7.34 psf in Q4 2011 to $7.17 psf this quarter.

The resulting $2.34 psf rent difference between Grade A and Grade B offices currently is much smaller than a $3.66 psf gap a year ago.

“Rents for Grade B offices have fared better this year principally as they enjoyed high occupancy rates going into this office market pull-back phase, but also as they benefited from expansion by existing tenants in these buildings,” said Mr Armstrong. In contrast, he said, Grade A rents came under pressure as vacancy rates went up after some major new developments were completed.

Looking ahead, things may change as Grade A space finds support while competition and second-hand space increase downward pressure on Grade B areas.

CBRE forecasts that over the next 12 months, Grade A rents will be flat, averaging $9.50 psf in Q4 2013, while Grade B rents could drop by 5-10 per cent to as low as $6.45 psf. This will result in the rent gap widening again to $3.05 psf. “The importance of tenant retention may feature more highly among landlords of older buildings,” says Mr Armstrong.

Calvin Yeo, executive director at Colliers International, says: “A major question is the potential take-up of secondary space that will be thrown back into the market from occupiers which have moved or will be moving to newer developments.”

Analysts say a crucial test will be how long Overseas Union Enterprise (OUE), the owner of 6 Shenton Way, takes to fill up the 440,000 sq ft which DBS vacated when it moved to Marina Bay Financial Centre (MBFC) Tower 3 between June and October this year.

BT understands that OUE has begun securing tenants for some of this space; rents are thought to be around $6-$7 psf. New buildings in the financial district such as Asia Square Tower 1, OUE Bayfront and MBFC Tower 3 are said to be currently fetching rents of $9-$12 psf per month.

On a positive note, industry watchers highlight that it took Pontiac Land Group just nine months to fill back all the 129,000 sq ft vacated by Citi in Centennial Tower in November last year when it moved to Asia Square Tower 1. Pontiac leased the space to major existing tenants such as Sumitomo Mitsui Banking Corporation and McKinsey while clinching new ones such as Frieslandcampina.

Citi also occupies about 143,000 sq ft at Millenia Tower next door. Of this space, the bank will be vacating 17,000 sq ft by this month – which will be immediately handed over to existing and new tenants whom Pontiac has pre-committed to, said a Pontiac Land spokeswoman. Citi will give up the rest of its space on lease expiry in December next year, she added. Current transacted rents in the two buildings are $9-$11.50 psf.

According to Jones Lang LaSalle’s head of markets Chris Archibold, activity among smaller occupiers of 15,000 sq ft or less is still fairly robust, and a lot of it is within the CBD. However, leasing agents say that big occupiers have become increasingly cost conscious. This has led to a drying up of big leasing deals in the CBD this year.

To save costs, some large companies are splitting front and back offices, while others are completely relocating to suburban offices and business parks.

Agents tip out-of-town locations as the most likely beneficiaries of any major pick-up in leasing deals in the near future, most notably at Ho Bee’s The Metropolis office development in Buona Vista, which will be completed next year.

Meanwhile, rents for Singapore’s CBD Grade A offices look attractive and are believed to be nearing their bottom. As Cushman & Wakefield country manager (Singapore) Toby Dodd highlights: “Singapore is currently a tenant favourable market, and we recommend leveraging this to lease Grade A CBD office space at very competitive terms locked in for the medium to long term.”

Mr Archibold advises landlords that while maximising shareholder value is always a key driver, “the right strategy is probably to also ensure that overall occupancy levels remain strong to mitigate any downturn in Europe”.

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