After climbing 27.5 per cent over nine consecutive quarters, the Urban Redevelopment Authority’s (URA) office rental index for Singapore’s central region fell 1.7 per cent in the first quarter of 2024 over the preceding quarter.

This contrasts with the 0.3 per cent quarter-on-quarter (qoq) increase in Q4 2023. Year on year, the index is up 5.8 per cent.

On the Q1 drop in the index, Cushman & Wakefield’s head of research for Singapore and South-east Asia, Wong Xian Yang, said: “Some landlords may have slightly relaxed their rental expectations to maximise occupancy rates in view of slower-than-expected office leasing demand given a higher-for-longer interest rate environment.”

“Additionally, more competition is on the horizon, with more supply from both primary and secondary markets in 2024,” he added.

Most property consultants have reported qoq rental increases for their Central Business District (CBD) Grade A office baskets for Q1 this year.

For instance, the gross effective average monthly rental value for Colliers’ CBD Grade A office basket rose 0.7 per cent quarter on quarter to S$11.57 per square foot (psf) in Q1 2024. This was after a 0.2 per cent qoq dip in Q4 2023.

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Catherine He, the head of Singapore research at the property consulting group, said the rent rise in Q1 was driven primarily by smaller spaces of below 10,000 sq ft, for which vacancy is very tight.

Agreeing, Savills Singapore executive director Alan Cheong said: “Landlords are holding smaller tenants to ransom because they do not have the capex budget to move. Even if rents are raised marginally, the tenants will find it more feasible to renew the lease than having to relocate.”

According to him, landlords of the lower tier of CBD Grade A buildings “have adjusted downwards their rents a little” but owners of top-tier Grade A buildings are still holding rents and, in a few cases, have inched up rents for smaller spaces.

Flight to quality

Andrew Tangye, the head of office leasing advisory for Singapore at JLL, said that generally, the group had observed a healthy level of leasing enquiries in Q1 2024 compared with the previous quarter. The leasing interest has come from the consumer goods, and professional and financial services sectors.

“However, the majority of these enquiries were from small and medium-sized occupiers that showed a preference for newer and better-quality buildings,” he added.

URA’s data showed that the islandwide vacancy rate of office space fell from 9.9 per cent as at end-Q4 2023 to 9.6 per cent as at end-Q1 2024, the lowest level since Q2 2016.

The improvement in vacancy came despite a contraction of 96,900 sq ft net lettable area of occupied office space as there was an even bigger shrinkage, of 441,300 sq ft, in office stock in the first quarter (due to the removal of several buildings scheduled for redevelopment).

Analysts note that in the face of capital expenditure (capex) constraints, high interest rates and geopolitical uncertainty, many occupiers are adopting a wait-and-see approach.

CBRE observed that movements in the market are being initiated by workplace transformations which are driven by strategic relocations, and most often, flight to quality. “This was keenly seen in the private wealth asset management, insurance and legal sectors,” said Tricia Song, head of research for Singapore and South-east Asia at CBRE.

“Conversely, sectors like traditional banking, technology, and agile space operators have adopted a more conservative stance this quarter, mitigating some of the rental-increase pressures,” she added.

Most property consultants are sanguine about prospects for the Singapore office market.

Cushman’s Wong said: “The overall health of the office market remains steady, and a prolonged rental correction is not expected. Singapore offices are still very well occupied amid good office attendance.”

“The launch of Singapore’s tripartite guidelines on flexible work arrangement requests is not expected to have a significant impact on Grade A office demand as many MNCs which are key occupiers of Grade A office spaces have already implemented or considered flexible working arrangements post-pandemic,” he added.

Pent-up leasing demand

Tangye of JLL said that barring external risks that could disrupt Singapore’s economic recovery, the demand for office space is projected to gain strength in the coming quarters. “This can be attributed to pent-up demand from occupiers that postponed their relocation or expansion plans. This should support ongoing rent increases for the rest of 2024.”

He added, however, that rent growth for the full year in 2024 is expected to remain moderate, given the high interest rate environment and significant office pipeline over the next 12 to 24 months that still needs to secure tenants.

Tangye highlighted that key developments in the CBD include IOI Central Boulevard Towers (1.3 million sq ft), which received its partial Temporary Occupation Permit in April 2024, along with Keppel South Central (0.6 million sq ft) and the redeveloped Shaw Tower (0.4 million sq ft) that are anticipated to be completed in 2025.

“With over 1.5 million sq ft of space in these new projects still available for tenants seeking flight-to-quality options, marketing activities for these projects have stepped up in recent months,” Tangye added.

URA data released on Friday (Apr 26) also showed that the price index of office space in the central region shrank 1.2 per cent in Q1 2024 from the previous quarter after easing 5.9 per cent qoq in Q4 2023.

Colliers’ He said that “more motivated sellers could emerge, due to the need to refinance or deleverage, especially for institutional players such as corporates and Reits”. This may result in more office assets coming to the market, putting further downward pressure on office prices, she added.