Rental gap to widen for new and old prime offices

Source : Straits Times – 17 Dec 2009

THE end is in sight when it comes to the supply glut in office space here, at least in terms of falling rental levels.

A leading property consultancy says new prime Grade A office properties – premium office space in prized locations – hold a clear advantage. In a new report, Jones Lang LaSalle has identified a growing rental gap between these new properties and existing prime Grade A office space. In other words, given a wide choice, tenants will tend to opt for the glitzy new building, even if it costs somewhat more.

The consultancy believes rental levels of the new premium space will bottom out in the second half of next year – as early as July. However, rentals of existing office buildings may touch their low point around December.

It said the growing rental price gap between newly completed prime Grade A buildings and existing prime Grade A buildings is similar to a trend in 2006. Back then, the new space commanded a premium of about 28 per cent, or $2 per sq ft per month.

Jones Lang LaSalle’s preliminary estimates show average gross effective rents of Grade A office properties in the heart of the CBD hit $7.80 per sq ft a month in the fourth quarter, down 4.9 per cent from the third.

Office rents here have been falling as demand slows and supply grows. Experts anticipate that rents will continue to fall into next year, though at a slower pace.

The good news for landlords: Activity has picked up lately, with many financial institutions planning for moderate growth – and more space.

Landlords competing for tenants are lowering rents and rolling out incentives at a moderate pace.

Islandwide ’shadow space’ – surplus space that companies carve out to sub-let to others – shrank to 600,000 sq ft in the fourth quarter, from 800,000 sq ft at its peak in the second quarter of this year.

This was because companies withdrew some of the shadow space they were previously marketing, said Jones Lang LaSalle.

Apart from Raffles Place, office rents in Tanjong Pagar, Suntec City area and Harbourfront are likely to touch bottom by the second half of next year, and stay flat in 2011, said Colliers International’s executive director (commercial), Mr Calvin Yeo.

The rate at which the market is able to absorb available space is crucial when more new supply comes onstream from next year, said Jones Lang LaSalle. Over the next three years, new supply in the core central business district will amount to almost

2 million sq ft a year, and ‘is likely to put a dampener on rental growth’, said its head of research of South-east Asia, Dr Chua Yang Liang.

The firm’s regional director and head of markets, Mr Chris Archibold, expects leasing activity to rise further next year if the global recovery keeps up.

‘Many large MNCs see business opportunity ahead and are planning for moderate growth, but are having difficulty establishing headcount due to the uncertainty ahead,’ he said.