Savills Singapore Office Lease Market in Limbo with No Significant Demand Driver

Savills Research reveals that the Singapore office lease market has not seen much excitement recently, with no particular industry filling the void left by tech companies. This has led to stagnant rents, with CBD (Central Business District) Grade A office rents in Savills’s selection remaining at S$9.65 per square foot per month after eight periods of rising costs.

Landlords aren’t facing immediate pressure to lower rents due to a manageable amount of new office spaces and most leases expiring in 2025-2026. As a result, well-occupied offices can still demand higher rents or even record increases, balancing out those buildings that have lowered rents to attract new tenants. Nonetheless, these rent reductions are insufficient for companies to justify the high capital expenditure and reinstatement costs needed to relocate, especially amid rising borrowing costs that make landlords hesitant to cover these expenses.

In specific areas, Grade A office rents have slightly decreased, with City Hall and Marina Bay experiencing a 0.1% and 0.2% drop, respectively. City Hall saw its first rent decline and Marina Bay its second consecutive decline. However, an opposite trend was seen in Beach Road/Middle Road where rents increased by 0.2% from the previous quarter due to higher rents at Bugis Junction Towers. Meanwhile, the rents in Orchard Road, Shenton Way, Tanjong Pagar, and Raffles Place remained unchanged, with Raffles Place flatlining after previously climbing for nine quarters.

According to Savills, the vacancy rate for Central Business District Grade A offices fell for the second straight quarter to 6.1%, which is the lowest since the end of 2022. This decline was observed across different grades of buildings, with Grade AAA and A buildings decreasing to 6.2% and 7.3%, respectively. The vacancy rate for Grade AA buildings stayed at 4.8%. With vacancy rates decreasing, there has been a positive net demand for CBD Grade A offices, noted as 136,000 square feet for the third quarter in a row.

Vacancy rates declined in almost all submarkets except for Raffles Place, which saw a slight increase. The largest drop was in City Hall, thanks to more tenants moving into the newly completed Guoco Midtown. Similarly, Centennial Tower and Suntec Tower 5 saw reduced vacancy rates. Compared to the same time last year, overall Grade A office vacancy rates saw a slight decrease, with mixtures of increases and decreases in specific submarkets.

The office investment sales had a significant drop-off after a strong previous quarter, with transaction values plunging by 95% to S$69.7 million. This dramatic fall resulted from the absence of large-scale transactions and scarce strata office sales, with only three strata office units being sold.

Ashley Swan, Executive Director of Commercial at Savills Singapore, predicts that the office market will mostly remain subdued for the year due to economic uncertainties, high capital costs, and changes in workforce dynamics. Despite a shift to hybrid working models, some companies are delaying office space decisions as they reassess their ideal workspace utilization.

According to Alan Cheong, Executive Director of Research & Consultancy at Savills Singapore, despite many tenants considering downsizing, resistance to rent reductions persists due to increased interest rates and rising operation costs. With an anticipated average annual new supply of Grade A Central Business District space versus the average annual net take-up over ten years, landlords might retain some bargaining power with only mild rent adjustments expected. Thus, Savills maintains their rental forecast for Grade A offices at a -2% to -3% decline for 2024.

The table below shows detailed micro-market Grade A office rent and vacancy rates for Q1/2024.

For the full Q1 Office Briefing document, click here to view in PDF format.