Excess supply in commercial property market, CBD rents expected to drop

The Singapore office market stabilised in the first quarter of this year.

Overall rentals dipped only 1.5 to two per cent compared with the previous three months.

Analysts said they expect rents in the central business district to fall further, as office tenants choose higher quality space.

Market watchers also believe that demand will not keep pace with new supply coming on stream.

Marina Bay Financial Centre and Asia Square will soon be dotting Singapore’s skyline, creating brand new Grade A office space.

Analysts said this will create a flight to quality, where office tenants take advantage of lower leasing rates and the prestige of locating in newer buildings.

Observers said this could affect the Raffles Place district.

“The grade A space market is a very niche market, so the tendency is that the newer landlords in the newer buildings like Marina Bay will have to look to the current Grade A tenants, and so you may see a hollowing out of tenants, Grade A tenants, moving from maybe Raffles Place to the new schemes in Marina Bay,” said Colin Tan, director of Research & Consultancy at Chesterton Suntec International.

Still, for now, demand for prime office space has been holding steady in the first quarter.

According to DTZ Research, the average occupancy rate for Grade A property space islandwide improved to 92.4 per cent, a 0.7 percentage point increase from the previous quarter.

Overall vacancy rates have also stabilised at 12 per cent.

Going forward, analysts said there will be a supply of 2.5 million square feet of office space per annum over the next three years.

“We expect to see demand continuing to grow, but I think it’s not going to be sufficient to match the supply that’s going to come onstream so we expect vacancy rate to go up again and also we forsee that rents are going to fall by about five to 13 per cent in the CBD for this year,” said Chua Chor Hoon, senior director of Research at DTZ.

According to DTZ Research, office rents are expected to bottom sometime in 2011 or by the end of the year, if the economy grows more strongly than expected.

Source: Channel News Asia, 1 Apr 2010