A tenants’ market downtown

Source : Today - 6 Jan 2008

A 30-per-cent fall in rental market expected this year

TENANTS for office space are beginning to enjoy more bargaining power as increased supply for such commercial property and a weakening economy drive rents lower.

This is good news for business owners such as Mr Hu Yinghan. Mr Hu, who runs an events company Apesnap in Chinatown, will be asking for much lower rent when his lease runs out at the end of the year.

“I shouldn’t have locked in last year,”Mr Hu told Today, adding he hoped toget a 30-per-cent discount from the $4 per square foot (psf) per month he is currently paying.

His wishes are likely to come true, if the forecast of seasoned property consultant Colin Tan proves to be accurate.

Mr Tan, head of consultancy and research at Chesterton Suntec International, said that the office rental market would face a sharp decline of about 30 per cent this year.

“For now, some landlords may not feel the pressure because they still have healthy occupancy. There’s a time lag with administrative procedures,” said Mr Tan, who added that most landlords would feel the pain by the middle of the year.

“Last year, some landlords may have been too greedy and taken advantage of the situation to squeeze the market,” saidMr Tan. “Now it’s facing shrinking demand and everyone’s locked in. There will be a lot more vacant space.”

And it’s not just small business owners who stand to benefit from the lower rents.

Prime office rents in Raffles Place fell last quarter, the first decline since the fourth quarter of 2003. Tenants there paid an average$16 psf per month in the last quarter, representing a 3-per-cent drop from the corresponding period a year earlier, said property consultants DTZ Research.

Grade A office market rents hit as high as $20 psf per month last year, but the office rental market is now turning into a tenant’s market, DTZ Research said.

In the last quarter, more offices became vacant as companies braced themselves for tough economic times by freezing headcount, reducing space needs, shelving expansion plans, as well as moving to cheaper locations outside the CBD. This resulted in office occupancy rates dropping by 2.6 percentage points to 95.6 per cent in Raffles Place, compared to the same period a year ago, said DTZ Research.

Analysts are predicting that prime office rents in the Central Business District (CBD) will dip to between $10 and $12 psf per month.

With the economy expected to remain weak, landlords who have been used to dictating terms now find themselves having to offer attractive lease incentives to retain existing tenants and secure new ones, they said. These include lease packages with rent-free intervals so that the overall effective rates are lower.

Although there have been some cutbacks on new office supply following weaker demand from recession-hit businesses, it does little to ease the impending supply glut, said analysts.

Potential office supply from 2009 to 2013 is now 11.3 million sq ft, just slightly down from the previous estimate of 12.1 million sq ft, said DTZ Research.

DTZ’s executive director, Ms Cheng Siow Ying, said: “More shadow space is likely to emerge, a lagged effect following retrenchments.”

More pockets of office space would become available when companies start relocating from their existing premises to pre-committed space in transitional offices and business park developments that will be completing this year,” she added, citing Citigroup’s move to Changi Business Park as an example.

To compound the oversupply, on top of the 3 million sq ft of new office space to be added islandwide this year, there could be an additional 1 million sq ft vacated by troubled companies as the recession deepens, Chesterton’sMr Tan estimates.

The retail rental market is also facing pressure. CBRE said that prime retail rents in Orchard area fell 1.9 per cent to an average of $36.10 psf per month in the fourth quarter last year, the first time these rents have headed south since 2003.

In the same period, rents of private industrial space also saw its first decline since 2003, said DTZ Research. Private industrial rents dipped by about 2 per cent quarter-on-quarter between $2 and $2.30 psf per month.