Office rents: Breakout or rebound?

/ EdgeProp Singapore
July 30, 2021 5:00 PM SGT
As office rents in the Central Region rebound, demand for affordable space could shift to city-fringe areas.
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SINGAPORE (EDGEPROP) - One of the largest workgroups affected by the pandemic is the crowds of office workers that used to populate Singapore’s Central Business District. Companies and their employees have borne the brunt of cycles of mandated remote working arrangements and the gradual loosening of restrictions over the past 18 months. (See also: Office rents up by 3.3% q-o-q despite higher vacancy rates)
Using EdgeProp Singapore’s Market Trends analytical tool, office resale transactions fell sharply in the first two quarters of 2020 (see chart 1) as the global scale and impact of the Covid-19 pandemic were revealed. Research by CBRE also shows that from 2Q2020 the net absorption of office space for the whole of Singapore tumbled and the overall vacancy rate was about 6% during that period.
But the pandemic has also accelerated trends that have changed the nature and profile of office spaces, especially prime office spaces in the CBD. Coupled with a trend of office decentralisation, companies looking for office space this year face a crossroads in their corporate real estate strategy.

End of falling rents

According to David McKellar, co-head of the advisory & transaction services office team at CBRE, the pandemic had a significant negative impact on Singapore’s office market over the past 18 months.
“However, after five consecutive quarters of rental decline we are now seeing our first quarter of rental growth [in 2Q2021],” says McKellar. He adds that new corporate entrants and an expanding technology sector, especially from Chinese technology companies, helped push up the office market performance.
A two-tier office market is emerging as demand is concentrated in Grade-A spaces, says McKellar of CBRE. (Picture: The Edge Singapore)
The latest statistics from the Urban Redevelopment Authority (URA) on July 23 shows some signs of recovery for the office market. In 2Q2021, office rents in the Central Region climbed 1.3% q-o-q after two consecutive quarters of decline.
According to CBRE, the positive results last quarter were marred by an increase in the island-wide vacancy rate which increased from 5.9% in 1Q2021 to 6.8% in 2Q2021. This was the result of earlier relocation moves and downsizing efforts by occupiers coincided with uncommitted new office supply, the consultancy says. In the Grade A office market, the vacancy rate increased from 3.3% in 1Q2021 to 4.4% in 2Q2021.
“Throughout the last 18 months, we’ve seen an increase in the amount of [office space] availability on a direct basis as well as in the secondary and shadow space market. What is emerging is a two-tiered market where demand is concentrated in the Grade A sector and there will be more leasing opportunities in the Grade B sector,” says McKeller.
Office supply demand dynamics CBRE - EDGEPROP SINGAPORE
However, he points out that the overall office market vacancy rate is still at relatively low levels compared to Singapore’s 10-year historical average office market vacancy rate, which is about 5.9%.
CBRE says that some landlords have been encouraged by the tighter vacancy rate in the Grade A market to push for higher rents as they benefit from the prevailing market condition in this subsector.

Is a CBD space worth it?

For some companies, retaining an office location in the CBD remains a vital corporate real estate choice despite the relatively higher rents and competition for office space.
One example is Top Alliance, a financial services company with about 140 employees. The company had leased an office space with flexible workspace operator JustCo at its co-working location at 20 Colley Quay but moved to a bigger office space at JustCo’s centre at The Centrepoint.
According to Lew Shing Choon, a group financial service director at Top Alliance, the company never shortlisted any office locations outside the CBD because it has a policy of only selecting office locations in the CBD.
As office rents in the Central Region rebound, demand for affordable space could shift to city-fringe areas. (Picture: Samuel Isaac Chua/The EdgeSingapore)
“This choice was made to help us grow and develop our company branding. We also feel that a CBD location is a more convenient and accessible choice for our employees who frequently travel around Singapore,” says Lew.
Two other real estate considerations were the size of the space to accommodate their growing company size, as well as the design of the office. “The factors that pulled us to sign with a co-working operator was the overall office environment and design of the space,” says Lew.
He adds that the office workspace technologies provided by JustCo were attractive, and its employees and guests also enjoy the customer service of JustCo’s community team.

Not a zero-sum game

The development of flexible workspace operators such as JustCo and WeWork into Singapore’s office market ecosystem has helped accelerate the trend of hybrid workspaces and flexible offices as part of corporate real estate.
Many co-working operators are now established tenants in the CBD, but they are not ignoring the trend of office decentralisation as sub-regional commercial hubs in city-fringe locales develop and grow.
But according to Ho Seng Chee, chief corporate officer at JustCo, this decentralisation trend should not be seen as a zero-sum game between the CBD and city-fringe office markets. “The trend of decentralisation has resulted in more people treating their office space as a flexible solution, not necessarily one that requires them to have a fixed office space in the CBD all the time but considering a fixed office in the CBD and perhaps a suburban location with a flexible office space,” says Ho.
The trend of decentralisation has resulted in more people treating their office space as a flexible solution, says Ho of JustCo. (Picture: The Edge Singapore)
He adds that companies should combine different types of office space options to come up with the right mix that works best for their employees and business. The flexible workspace operator is also responding to the changing needs of its clients with more scale, flexible options, and technology.
In terms of scale and flexibility, Ho says: “We must have multiple locations so that our customers can have the workspace they require, at the location they require. It also means that our contract terms and our periods must be more flexible.”
Technology is also helping JustCo reach its customers and offer various pay-per-use workspace solutions, even for people who are not within its JustCo community.
In the near term, McKellar does not expect suburban and city-fringe office rents to match levels in the CBD, but as these city-fringe precincts grow and popularity he expects to see a narrowing of the gap between these submarkets.
“At the end of the day, the market is going to pay a premium for innovative developments that provide a high level of amenities and promote greater utilisation of the space by their employees. This could be in the CBD, city-fringe, or decentralised submarkets,” says McKellar.

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