Idle offices

Source : Today - 29 Jan 2009

Analysts expect more ’shadow space’ ahead

Even as office rentals are tumbling fast, more space is lying idle at vacancy levels approaching those seen just before the recent boom years.

As at the end of last month, the island-wide vacancy rate ofoffice space stood at 8.8 per cent,up from the third quarter’s rate of8.2 per cent, according to data released last week by the Urban Redevelopment Authority (URA).

A big reason was a sudden year-end exodus: Occupied office space dropped by 34,000 sq m in the fourth quarter, an about-turn from the increase of 16,000 sq m in the previous quarter.

The negative take-up in the last quarter “effectively wiped out the take-up in the first six months of 2008″, said Mr Li Hiaw Ho, executive director of CBRE Research.

Mr Donald Han, managing director of consultancy Cushman and Wakefield, pins it down to the rocky banking sector, where financial institutions have been releasing excess space into the market. When tenants lease, or sub-let their premises, the excess space added to market supply is known as “shadow space” in industry terminology.

“In months to come, as companies downsize, we might see more supply coming from shadow space,” Mr Han told Today. “The current problem is lack of demand.”

For now, he isn’t too worried about the vacancy rates creeping up. “As long as it’s a single digit, it’s okay,” he said.

But a touch away from double digits are Category 2 office space, which refers to areas outside of the central business district and Orchard. The vacancy rate for Category 2, which accounts for about 80 per cent of all office space in Singapore, was 9.8 per cent at end-December; it was 15.1 per cent in early 2005, the year before the global economy started its three-year upswing.

Undoubtedly, the market has turned in favour of tenants. The decline in office rentals is accelerating, as they slipped6.5 per cent in the fourth quarter from the third quarter, a quicker pace than the 0.8-per-centdecline in the preceding quarter, according to URA statistics.

But present rentals remain dramatically higher than four years ago. URA said tenants who signed their leases in the fourth quarter typically agreed to$5.94 per square foot per month (psf pm) for Category 2 office space. That is little changed from the median rentals of $6.01 psf pm and $6.43 psf pm for leases that took effect in the fourth and third quarters respectively.

It is also a far cry from Category 2’s median rental of about $3.10 psf pm for leases inked in 2005.

There is much more room to go down south. Said CBRE’s Mr Li: “The office leasing environment will be highly competitive as rents continue to fall through 2009.”