SINGAPORE (THE BUSINESS TIMES) - It took a while, but the high end of Singapore's office rentals finally hit the bottom this year - earlier than expected.
This was because the take-up rate for Grade A office space in new developments in the Central Business District (CBD) was more robust than anticipated. Another reason was the rosier economic outlook.
Most property consultants expect the upward rental momentum to continue next year, citing expectations of continued healthy demand for office space from the likes of tech companies and co-working operators.
Some agents are also pinning their hopes on a recovery in demand from financial institutions, traditionally the major occupiers of CBD offices.
However, at least one office-leasing veteran is being more cautious.
Moray Armstrong, CBRE's managing director for advisory and transaction services, said: "Rental growth in the office sector is expected in the near term, but will likely be at modest rates, while the market absorbs the remaining space from the supply surge over the last two years."
The tightening availability of quality space in 2019-2020 means that the market is likely to start delivering slightly stronger rental growth in 2019.
He added: "Most indicators are positive for the Singapore office sector, but the underlying strength of occupier demand remains patchy and limited to a select group of sectors - including technology and co-working and, to a lesser extent, insurance.
"A more broad-based demand recovery will be needed to lend support to an overall stronger rental growth story."
That said, the Grade A segment is expected to outperform, given favourable supply dynamics and the fact that it had experienced a deeper correction through 2015/2016, he added.
Ashley Swan, senior director of commercial at Savills Singapore, said that from a tenant's perspective, the biggest challenge in the office leasing market this year has been the acceleration of rents. This caught many by surprise, as it does not represent the general business sentiment, which is seeing some green shoots - but not robust growth.
"Some sectors like technology continue to grow quickly; others like financial institutions, and oil and gas remain challenging."
In late June this year , JLL was the first property consulting group to point out that Grade A office rents in Singapore's CBD may have bottomed in Q1. The average monthly rental value for its basket of such office space inched up 0.7 per cent to S$8.50 per sq ft (psf) in Q2, from a low of S$8.44 psf in Q1 - making for the first quarter-on-quarter uptick after two years of declines.
JLL's head of Singapore research and consultancy Tay Huey Ying estimates that the Q4 2017 rental figure will come in at about 8 per cent to 10 per cent higher than Q4 2016.
She predicts a further hike of more than 10 per cent in 2018, citing expected steady economic growth and sharply tapering pipeline supply over the next two years.
JLL's head of markets Chris Archibold estimates that the average rental value of JLL's prime CBD Grade A office basket - capturing the choicest office buildings, mostly in Marina Bay - will end this year with an 8 per cent to 9 per cent year-on-year gain, and then climb a further 12 per cent to 16 per cent next year.
Savills Singapore envisages a similar pattern, forecasting a nearly 15 per cent gain in 2018 for the average monthly rental value of its AAA office basket, comprising the creme de la creme of CBD office stock; this outpaces the 10 per cent predicted rental rise for its overall CBD Grade A basket and follows hikes of 4.4 per cent and 1.9 per cent respectively this year.
Alan Cheong, research head at the firm, said: "In 2017, landlords were emboldened when they saw the high take-up for newly completed CBD Grade A office buildings. With these properties sustantially leased, landlords feel less pressure and have upped their rents."
Mr Swan added: "When news of Facebook's lease of around 300,000 sq ft in Marina One broke earlier this year, office landlords became more optimistic."
Mr Cheong noted that the upbeat office leasing mood applies not only to new developments but also in some cases to secondary stock that has arisen in older buildings from tenants relocating to new projects. "Such space has, in many instances, been backfilled by smaller tenants and co-working operators who need a CBD presence for image purposes."
An example is Distrii, a Chinese co-working space operator which has leased over 60,000 sq ft on the lower levels at Republic Plaza; this was part of the space that Japanese bank MUFG vacated in the building when it moved to Marina One.
Mr Cheong said: "Landlords believe that these positive office leasing trends will continue in 2018 and are thus prepared to ask for higher rents."
The upbeat pronouncements on office rents come despite a rise in vacancy rates.
With the completions of Guoco Tower in Tanjong Pagar and Duo Tower in Bugis in 2016, followed by Marina One's East and West Towers and UIC Building in Shenton Way this year, the Urban Redevelopment Authority put the island-wide office vacancy rate at 13.3 per cent as at end-Q3 2017. (The rate was 9.5 per cent at the end of 2015 and 11.1 per cent at end-2016.)
The rising vacancy rate this year may seem incongruous with the recovery in CBD Grade A office rents, but property consultants say that this comes from the lumpiness in new project completions.
For example, Marina One's two office towers added about 1.9 million sq ft; they were completed this year but most tenants have yet to move in, either because they are fitting out their new premises or staying on at their existing premises, pending the end of their current leases.
JLL's Ms Tay said: "As more occupiers move into their new premises, and against a backdrop of continued improvement in office demand and lower new completions in 2018, we can look forward to vacancies abating. This will fuel rental growth."
CBRE estimates that office completions will ease by 35 per cent to around 1.78 million sq ft next year (with the major completions being Frasers Tower and Paya Lebar Quarter) from 2.73 million sq ft this year.
Over the past 12 to 18 months, many of the relocations have involved businesses moving from older, smaller floor-plate buildings to newer buildings with larger, more efficient floor plates, noted Mr Archibold of JLL.
"This has been spurred by the increasing global trend for companies to look at the way they occupy their space and put in place more flexibility around how their staff use it (by incorporating different types of shared work space).
"This has a positive effect on both the efficiency of the space and the desirability from a user's point of view."
Agreeing, Mr Swan said he expects tenants to continue focusing on an agile office strategy next year. The resulting space saving will come in handy in the face of rising rents.
Some observers are upbeat that there is still room for co-working operators to grow next year, but others predict a slowdown, with a possibility of some mergers and acquisitions in the sector.
On a more positive note, there are some bright spots for office demand on the horizon.
Mr Archibold said: "We have seen the cessation of the reduction in space by many of the regional and global financial institutions. While this trend has not completely ceased, it is far reduced from 2016 and in some sporadic cases, we have seen growth in this industry."
Agreeing, Mr Armstrong said: "The banking sector looks set to navigate its way towards better times." A stable and stronger global economic recovery will drive demand for complementary business services - for example, financial, professional services, legal, advertising, he added.
The tech sector is expected to be bolstered by The Smart Nation initiative. "And there is still a large amount of venture capital funding for new and existing tech firms that will help drive their expansion globally; Singapore continues to stand out as an attractive gateway to South-east Asia for such tech firms, said Mr Armstrong.
Some agents predict that with the balance of power gradually shifting towards landlords, they would be inclined to delay commencement of lease-renewal discussions to around six months before lease expiry - to try and lock in higher rents.
An agent who declined to be named quipped: "When the market is going up, landlords tend to stick closer to the terms of the lease agreement, which typically states that renewal negotiations begin six to nine months prior to expiry. But when rents are going down, landlords are happy to engage tenants 12 to 18 months ahead of lease expiry."
Giving his take, Mr Armstrong said: "Tenants will be best positioned by taking early action on future office decisions."