Grade A CBD office rents inched up 9.5% in 2018

Marina Bay saw the largest rental increase at 17.1%.

Grade A office rents in the Central Business District (CBD) edged up 9.5% YoY in 2018 amidst a supply crunch and higher vacancy rate, according to a report by Savills Research.

The strong rental growth was led by the Grade AAA office sector, which rose 4.8% QoQ in Q4 and 16.3% YoY, and the Grade AA office sector, which grew 3.2% QoQ and 11.8% YoY.

In Q4, Marina Bay reportedly saw the largest rental increase on a quarterly basis at 4.8%, followed by Raffles Place (3.5%) and Tanjong Pagar (3.2%). In 2018, the top three micro-markets enjoying the strongest rental growth were Marina Bay (17.1%), Shenton Way (10.7%), and Tanjong Pagar (10.5%).

Tightening available space for lease and higher rents achieved in newer prime grade developments, such as Marina One and Frasers Tower, lent support to these sub-markets, Savills noted.

Also read: Office supply pipeline could hit 704,000 sqft in 2019

An active investment sales market and high prices achieved in recent deals supported the capital values of CBD Grade A offices, which rose 3.9% QoQ and 4.8% YoY to S$2,910 psf in Q4 and 2018.

“On the investment sales front, buying attention quickly turned towards the office sector on the back of strong rental growth, after private residential cooling measures came into effect 6 July 2018,” the report’s authors explained. “As a result, a few big-ticket office deals closed in the last quarter of 2018.”

These included the $908m paid by OUE Commercial Real Estate Investment Trust for the office component in OUE Downtown at Shenton Way, the $608m sale of 78 Shenton Way to PGIM Real Estate and the $555.5m outlay made by ARA Asset Management and British property group Chelsfield for Manulife Centre at Bras Basah Road, Savills highlighted.

Whilst leasing demand was led by technology, media and telecoms companies as well as the continued expansion of coworking space operators, Savills noted that the office space available in 2018 declined 11.1% YoY from 2017’s 1.57 million sqft to 1.4 million sqft.

Vacancy levels of Grade A office space in the CBD rose to 8.1% in 2018 from the 7.7% recorded in Q3 on the back of delayed timing of tenants moving into new buildings, Savills said.

“For example, for the newly-completed Frasers Tower included in the Savills basket in Q4 2018, although most of the 664,000 sqft office space had already been pre-committed, many major tenants had not yet moved in. This also pushed up the vacancy rate in the Shenton Way sub-market, where the project is located, by 12.3 percentage points (ppts) QoQ to 16.1% at the end of 2018,” the authors highlighted.

Going into 2019, supply is forecasted to remain tight for the Grade A CBD office market, with an estimated 693,000 sqft of Grade A office space slated for completion during the year. Savills added that some 260,000 sqft of space from Chevron House at Raffles Place was taken out of the market for an asset enhancement initiative in Q1 2019.

Also read: CBD Grade A space market could remain constrained until 2021

In addition, although the vacancy level of CBD Grade A offices has increased, the report’s authors pointed out that it feels as if vacancy levels are in the 2-3% range, given that options are limited for tenants requiring 20,000 sqft or more of office space to move into or to expand into, with suitable offerings in the market less than five in number. 

Photo from Google Street Maps.