Grade A office space occupancy dips to 93.5% in 2Q 2011

The slip in occupancy rate was most pronounced in the Raffles Place/New Downtown where it fell 1.5 percentage points to 94.2%.

The decrease was also evident in Beach Road micro-markets which fell 3.2 percentage points to 90.6%, says Colliers International.

According to Colliers’ office property market report, the relief in occupancy rates came about as occupiers’ initial exuberance for office space in response to Singapore’s strong economic turnaround from the global financial crisis subsided, and leasing activities returned to a more moderate level in 2Q 2011.

While flight to quality continued in 2Q 2011 – driven mainly by businesses in the financial services sector, such as Citic Bank International’s intended move to Asia Square Tower 1, it was taking  place at a slower pace, which is also in line with the stabilisation of expansion and consolidation plans of major large space users.

In addition, the widening gap in rental expectations – as a result of landlords continuing to raise asking rents to leverage the up-cycle in the office property market – has started to meet with some resistance from tenants, which in turn, contributed to a moderation in the leasing exuberance.

The easing of the office occupancy rate was also the result of the continued rise in the availability of space for lease, which stemmed from the gradual completion of new office outfits developed mostly on Government land sites sold during the 2007/2008 market boom, as well as the impending secondary office space that would re-enter the market when tenants relocate to their pre-committed new premises.

Meanwhile, the mushrooming of new office and business park developments outside the CBD, which offers office-like specifications at comparatively lower rents has widened the option for qualifying office tenants and consequently, adds to the rising supply of space in the market.

Competition for tenants – given the normalisation of demand amid rising supply of office space, as well as business park space as an alternative option for qualifying users – has in turn, continued to help to keep the rental growth of Grade A office space, specifically in the Raffles Place/New Downtown micro-market within the single-digit territory in 2Q 2011.

The average monthly gross rents of Grade A office space in this micro-market grew by 7.0% quarter-on-quarter (QoQ) in 2Q 2011 to reach $10.40 per sq ft. This is a little slower than the 8.0% gain recorded for 1Q 2011.

Overall, the average monthly gross rent of islandwide Grade A office space recorded the third consecutive quarter of moderation in QoQ growth to 6.0% in 2Q 2011.

The continued single-digit rental growth indicates an inclination towards moderation, which is a positive sign that the office property sector has averted an overheating situation in the current recovery cycle. This also addresses concerns over the possibility of rents matching or exceeding the previous peak achieved in 2008 in the short to medium term.

As of 2Q 2011, overall CBD Grade A office gross rents remain some 37.4% below the $14.22 per sq ft per month achieved during the peak in 3Q 2008, while the average monthly gross rents of Grade A office space in the Raffles Place/New Downtown micro-market are still some 41.9% off the $17.89 per sq ft per month in 3Q 2008.

The release and sale of the large amount of Government land sites during the 2007/2008 market boom, which resulted in a strong pipeline of projects today to meet the wave of buoyant demand, has played a large part in bringing about this gentler recovery path.

The office property sales market also moderated in 2Q 2011, although growth remained robust, supported by the continued prospect of rising office rentals, a sustained low interest rate environment as well as limited supply of saleable prime Grade A office space. The move by sellers holding back the sale of such properties, in anticipation of price appreciation, further reduced their availability in the sales market.

The average capital value of Grade A office space in the Raffles Place/New Downtown micro-market rose 3.5% QoQ to reach $2,403 per sq ft in 2Q 2011, down from the hefty 11.2% QoQ growth recorded in 1Q 2011. Nonetheless, it is still some 14.6% below its previous peak in 3Q 2008. 

Photo credit: marboed