Prime office rents could plunge by up to 40%: Report

Source : Straits Times - 8 Jan 2009

OFFICE rents in prime districts could dive as much as 40 per cent by next year, says consultancy Cushman and Wakefield in a new report.

The industry has been expecting falls, but the magnitude of the projected slump is surprising. The consultancy blames a huge stock of office space that is rising amid tough times and rising job losses.

‘The fact that Singapore is an international financial centre also means it will be badly hit during the downturn as a lot of investment activities are dependent on foreign participation,’ it said.

Prime office rents, it said, will fall from a high of $14.20 per sq ft a month last year to $12 psf a month this year. It expects this to drop to about $8 psf next year, and to about $7.50 psf by 2011, when prime office vacancy rates are set to rise to 11 to 15 per cent.

But rents remain above the $7 psf witnessed in previous peaks of 1995 to 1997 and 2005 to 2006.

Three factors, said Cushman, are contributing to the fall in rents. First, office stock is rising at a time when economic growth is stagnating or falling.

Second, a huge pipeline of office inventory is building up because of the overwhelming optimism shown by developers during the boom years of 2006 and 2007.

And third, employment is likely to flatline or even shrink by 1 per cent, as seen in downturns in 1998 and 2001-2002.

‘The rate at which new supply is added to existing stock in 2009 and 2010 will be one of the highest since 1992,’ said the report.

Pre-commitments by tenants for office buildings due for completion this year and next are estimated to be only 30 per cent so far. The rate is not expected to improve in the near term, said Cushman.

A total of 10.7 million sq ft of office space will be available by 2013 - of which 2.7 million sq ft will be ready by 2010 - representing about 15 per cent of total stock, it said.

Office stock in the Central Business District will rise by up to 7 per cent by 2010 to 2011 - the second highest rate after 8.7 per cent in 1995 when economic growth was higher.

But demand, which averaged about 2 million sq ft a year in the past two years, is expected to fall by more than half, and possibly to just 500,000 sq ft a year.