But some experts are upbeat vacant space will be absorbed
AS LARGE tenants prepare to move into gleaming new offices, including the much-anticipated Marina Bay Financial Centre (MBFC), landlords at older office blocks are searching for replacements.
'Raffles Place will be particularly hard hit, with five to six buildings seeing major tenants relocate to either MBFC or new schemes in Tanjong Pagar,' said office leasing agent Corporate Locations director Edmund Goh.
The mini exodus includes companies such as Barclays Capital, Normura, Macquarie and Standard Chartered, which have announced their impending moves to newly minted space such as MBFC.
CB Richard Ellis estimates a vast 4.1million sq ft of Grade A office space will be ready this year and next, including MBFC and Ocean Financial Centre.
Broadly speaking, rents at these new office buildings tend to be somewhat higher than the likes of Raffles Place.
The take-up of this spanking new space means a large pool of office space could be left vacant in coming months.
The MBFC's first phase - commercial towers one and two, boasting about 1.6million sq ft - will be ready in the third quarter and is almost fully leased apart from a small percentage reserved for existing tenants' expansion.
However, experts say that its full impact on rents will not be felt till the last quarter of this year, when the actual relocation begins and asset managers have a clearer picture of occupancy rates.
Ms June Chua, director of commercial leasing at Savills Singapore, said she is 'cautiously optimistic' vacant space will be absorbed. 'Vacancy levels at some of the older buildings will definitely increase and we might start seeing rental corrections early next year... But there is no firm general trend as rentals are building-specific depending on occupancy rates, which have not yet been finalised.'
Other experts, however, are more optimistic. They say older buildings are unlikely to see a hollowing out as leasing activity has been picking up in tandem with the robust economic recovery.
Firms that held off expansion amid the recession are gearing up to take advantage of competitive rents, they say. Smaller firms might also see this as a chance to get a foothold in prime areas.
Citi Private Bank co-head of global real estate Quek Kwang-Meng said that while larger tenants have flocked to newer projects, older and less pricey Grade A office space will still be in demand as this caters to smaller tenants such as law firms.
Knight Frank group managing director Danny Yeo said that with an influx of new foreign firms, he does not expect older Grade A offices to remain vacant for long. He expects rents to stabilise this year and possibly rise next year if the recovery is sustained.
'Large financial services might require large spaces at MBFC but there are smaller funds or companies which are not suited for that location... Raffles Place is not a concern, I might be more worried about Robinson Road instead, although it is still too early to tell.'
Some real estate investment trusts said that despite losing tenants, the high pre-commitment levels in new developments reflected healthy market demand.
Mr Andy Tan, senior vice-president of MEAG Pacific Star Asset Management - the manager of Capital Square, which houses units of Barclays and Macquarie - said net absorption of office space has stayed positive for the last three quarters.
'This is a sign of improving conditions and with the economy on the growth track and employment expected to continue on the uptrend, the demand and growth of the office market is still sustainable. We remain confident of Capital Square's potential and are... in the process of securing new tenants,' he said.
CapitaCommercial Trust Management chief executive Lynette Leong said there are clear signs that office demand has recovered and that office market rentals may have reached a trough.
'We do not think there will be a significant hollowing out of office space from Raffles Place.' Given the rebound in demand, vacated space could easily be filled by tenants who need to expand or new tenants attracted to the area, she said.
However, the largely uncommitted new office supply of 4.5 million sq ft projected for next year and 2012 still leaves a question as to when office market rentals will recover and to what degree, she said.
-------------------------------------------------------- TWO SCENARIOS
Departure of major players from Raffles Place causes rents in area to fall
Smaller firms grab chance to move into prime office space, so hollowing out effect is temporary