Slide in office, industrial rents continues in Q2

Source : Straits Times – 7 Jul 2009

LANDLORDS took a one-two punch in the second quarter, with rents continuing to decline for offices and industrial space as vacancies kept rising.

Rents were under the most pressure in the city-fringe and high-tech sites while more space was vacated, particularly in the core Central Business District (CBD) area.

Consultants DTZ said office rents in Beach Road and North Bridge Road fell 20 per cent to $6.20 per sq ft (psf) per month in the second quarter. This followed a 13 per cent fall in the first quarter.

Rents along the Alexandra Road belt fell 23 per cent to $5 psf a month in the April to June period, compounding a 13 per cent drop in the first quarter.

The decline was driven mainly by competition from a converted state property and high-tech industrial sites in the area.

Generally, rents in the office market have been falling as demand weakens in the face of rising supply. The amount of grade A space, in particular, will double in the next five years.

CBRE said monthly prime office rents fell about 18 per cent to $8.60 psf in the second quarter, after a 18.6 per cent quarter-on-quarter drop in the first quarter.

Grade A office rents are down 17.5 per cent to $10.l5 psf a month. They also fell 18 per cent in the first quarter.

DTZ said Raffles Place office rents are now close to the levels at the end of 2006 and are 49 per cent below the peak in the third quarter last year.

The rental gap between office space in the CBD and that elsewhere has narrowed. Offices in Marina Centre are now 12 per cent cheaper to rent than those of prime space in Raffles Place, compared with a rental gap of 18 per cent at the peak of the market. The gap has closed even more in the Harbourfront area – from 47 per cent at the peak to 35 per cent in the second quarter.

Some firms, particularly those driven to relocate outside the CBD during the 2006-2007 boom, are now likely to return, said DTZ.

Office leasing activity continues to be driven mainly by lease renewals as firms downsize. Take-up has been negative for the past two quarters and is likely to remain so for the rest of the year, said CBRE’s executive director (office services), Mr Moray Armstrong.

‘We are seeing greater incentives including, for instance, capital expenditure contributions to attract or retain quality tenants,’ he said.

The good news is that the rate of rental decline will ease from the dramatic falls seen since last September but demand will still be ’severely constrained’.

Vacancy rates across the island are tipped to be in the double digits in the next few years and leasing deals will stay highly competitive, added Mr Armstrong.

Still, office capital values held firm in the second quarter as improved buying sentiment in the residential sector spread to other sectors, DTZ said.

In the industrial market, the high-tech space segment – this includes business park space that caters to both markets – continued to be the hardest hit and is forecast to remain under pressure, it said.

High-tech industrial rent fell 12.8 per cent – the most in six years – to $3.40 psf in the second quarter. It is down 24.4 per cent from the peak of $4.50 psf in the third quarter last year, said DTZ.

First-storey industrial space slid 6.8 per cent to $2.05 psf a month.

Ms Chua Chor Hoon, DTZ’s head of South-east Asia research, said ample supply will keep the office and industrial markets soft until 2011.