Office vacancies rise, rentals fall despite positive take-up

Fresh supply coming to the market outstrips rejuvenated demand

THE office market posted a positive take-up of 3,000 square metres (or 32,292 square feet) in the third quarter of this year - reversing three consecutive quarters of negative take-up, according to latest figures released by Urban Redevelopment Authority (URA).

Office take-up shrank 247,570 square feet in Q2 this year, 322,917 sq ft in Q1 2009 and 365,973 sq ft in Q4 last year.

Despite Q3's positive take-up figure, vacancy rates continued to rise and rents slipped further in the third quarter as the supply of new office space completed doubled to 1.25 million sq ft in Q3 this year from 552,188 sq ft in the preceding quarter.

Among the projects that were completed in the July to September period this year were Mapletree Anson, 71 Robinson Road and transitional office developments at Scotts Road and Anthony Road.

The islandwide vacancy rate for office space rose from 10.8 per cent as at end-June 2009 to 12.2 per cent as at end-September.

The vacancy rate for URA's Category 1 space - which covers major office buildings in the Downtown Core and Orchard Planning Area that are modern or recently spruced up, and have big floor plates - increased from 6 per cent as at end-June to 6.5 per cent as at end-September.

The vacancy rate for Category 2 space - which refers to the remaining office space on the island - climbed from 11.9 per cent to 13.4 per cent over the same period, reflecting the flight to quality among occupiers that property consultants have been talking about.

The monthly median rental for Cat 1 space based on contracts inked in Q3 was $9.50 psf, down 10.3 per cent or $1.09 psf a quarter earlier. This brings the decline since the end of last year to 27.7 per cent. For Cat 2 space, the median monthly rent dropped 4.3 per cent to $4.89 psf in Q3 or a 17.7 per cent decrease since end-2008.

Cushman & Wakefield's research director Ang Choon Beng expects positive office take-up seen in Q3 to continue. 'Singapore's economy has clearly come roaring back and we believe the momentum will likely lead to increasing levels of positive office space absorption through 2010.'

Knight Frank chairman Tan Tiong Cheng said that while office take-up will continue to be positive as the economy recovers, it is unlikely to catch up with the increase in new supply completions. As a result, office rents will continue to decline next year albeit at a slower pace. Likewise vacancy rates will continue to rise.

CB Richard Ellis executive director Moray Armstrong predicts that positive take-up will continue this quarter although this will not be sufficient to erase the negative take-up seen in the first half of this year.

'Demand will be reasonably strong next year, but vacancy rates will continue to rise through 2010 on the weight of new supply completion.

Vacancy will probably peak at the end of 2010, by which time we expect rents will have bottomed out,' he predicts. 'It's not unreasonable to project rental growth from 2011 onwards,' he added.

Knight Frank's Mr Tan said that in the absence of distressed or fire sales, office capital values are likely to find their bottom sooner than rents.

'At worst, cap values may just stagnate until there is further evidence of improvement in the economy,' he added.

Source: Business Times, 24 Oct 2009