Grade A office space rents to half by end 2009, hitting five-year low

Source : Channel NewsAsia - 9 Apr 2009

The cost of prime office space in Singapore is expected to halve by the end of the year, to hit almost five-year lows.

It fell sharply by 25 per cent to about S$9.20 per square foot per month in the first quarter this year, compared to the previous quarter.

Analysts expect a similar fall in the second quarter, before a moderation in the second half of the year.

2.4 million square feet of office space will come on-stream in Singapore’s central business district annually over the next three years. This comes at a time when demand is flagging due to the global economic downturn.

“38 per cent of tenants in prime office areas are financial institutions. This is the first sector of market impacted by global financial crisis. In Raffles Place for example, at least about 60 per cent of composition of prime office in Raffles Place is financial institutions,” said Donald Han, managing director of Cushman & Wakefield Singapore.

“Unless the economy picks up and office demand picks up to absorb all this office space, we’re going to see office occupancy rates fall to around 85-88 per cent by end 2009,” said Nicholas Mak, director at Knight Frank.

This means rents could fall to around S$6 per square foot a month - down from the S$19 per square foot per month seen during the peak in 2008. Occupancy rates at the time hovered close to 100 per cent.

With a recovery in the office market pegged to the global economy, the earliest possible recovery may come only in 2010.

“We do expect the Singapore economy to show signs of recovery somewhere next year and this will result in some stability in the office leasing market. And we can see office occupancy rates touch somewhere around the lower half of 80-over per cent, and probably stabilise in that region before staging some kind of recovery,” said Mak.

So for the next few years, Cushman and Wakefield expects tenant retention programmes to become a top priority for landlords.

Tenants are likely to renegotiate rents, or opt for package deals. And retaining tenants is expected to become a top priority for landlords.

Outside the prime region, occupancy rates remain relatively well-supported. Rents there have fallen by at most 50 cents from a S$6.50 per square foot per month rate. Analysts also noted that these rents have less room to fall as they did not see the kind of increases the prime area did.