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[UPDATE] Central Region office sector ends 2022 on a high, with rental and asset repricing ahead

SINGAPORE (EDGEPROP) - Office sector rents in Singapore’s Central Region rose for a fifth straight quarter at 5.1% q-o-q in 4Q2022, the highest quarterly growth since 1Q2021 at 5.4%, according to URA data released on Jan 27. The growth was propelled by Central Area office rents, up 6.6% q-o-q in the last three months of 2022, offsetting a 4.0% q-o-q decline in the Fringe Area.

For the full year, office rents in the Central Region grew 11.7% y-o-y, a sharp acceleration from the 1.9% rise in 2021. It is the steepest annual increase since 2010, when office rents rose 12.6%. “It underscores the undisputable role of physical offices in the post-pandemic hybrid-working world,” says Tay Huey Ying, JLL head of research & consultancy, Singapore.

While 2022 office performance ended on a high note, rental growth in the Central Region is expected to slow. “A weakening global economy, tightened financing conditions and a pull-back in tech demand would soften office demand and lead to slower office rental growth going forward,” says Wong Xian Yang, Cushman & Wakefield head of research, Singapore.

Office demand from large occupiers contracted towards the end of 2022, “especially from the tech sector”, with expansion activity curtailed, says Tricia Song, CBRE head of research, Southeast Asia.

Global tech giants embarked on cost-cutting measures in 4Q2022, which included culling jobs. After the US$44 billion ($57.8 billion) takeover by billionaire Elon Musk in October last year, social media company Twitter's overall headcount is down from 7,500 staff at the start of 2022 to 2,300 in November. Social metaverse company Meta (formerly Facebook) laid off 11,000 (13%) of its staff last November.

In early January, Amazon said it had plans to lay off more than 18,000 jobs, up from the 10,000 indicated last November. Microsoft is letting go of 10,000 employees. Alphabet, Google’s parent company, is axeing 6% or 12,000 of its staff. IBM is shedding 3,900 jobs.

Twitter’s Singapore office at CapitaGreen closed abruptly on Jan 12, according to a Bloomberg report, with staff told they will be working remotely thereafter. The 22,000 sq ft office space at the 40-storey CapitaGreen on Market Street in the CBD has served as Twitter’s Asia Pacific headquarters since 2015.

Sea, the parent company of e-commerce firm Shopee, has given up 200,000 sq ft of Grade-A office space at Rochester Commons. Google Asia Pacific, which took up 344,000 sq ft at Alexandra Technopark three years ago for expansion, has stalled on its move into the new space.

Video streaming giant Netflix has offered one of its two floors at Marina One West Tower for sublease. The space is equivalent to about 30,000 sq ft at the Grade-A office tower in Marina South, Singapore’s Downtown Core.

With some tech companies having offered their space “on an early surrender basis”, the amount of shadow space is expected to increase, says CBRE’s Song. “Landlords exposed to immediate term availability may need to consider more competitive commercial terms in the near term to compete with existing vacancies.”

More occupiers are expected to put real estate expansion and relocation plans on hold, adds JLL’s Tay. Leasing activity is likely to be “dominated by renewals and right-sizing, while expansions are likely to be confined to occupiers with immediate needs to accommodate the significant increase in headcounts in 2022 to cope with business growth”, she notes.

The year ended with an islandwide vacancy rate of 11.3%, down 0.4 percentage points, as withdrawals of space increased to 248,000 sq ft while occupied office space increased by only 97,000 sq ft. “This is the lowest vacancy rate since 1Q2020’s 11.0%,” says CBRE’s Song.

Office space net absorption for the full year in 2022 totalled 474,000 sq ft, compared to a negative net absorption of 614,000 sq ft in 2021. The figure is also the highest since 2019’s 1.67 million sq ft.

Luxury watch seller Cortina Holdings purchased the entire fourth floor of 13,735 sq ft at 15 Scotts for $49 million ($3,567.5 psf) in October, followed by the November purchase of three strata units of 2,497 sq ft on the sixth floor for $10.1 million ($4,028 psf) by a Chinese investor (Photo: Cushman & Wakefield)

JLL’s forecast is for monthly gross effective rents of its basket of Grade-A CBD offices to increase by less than 1% in 2023, following the 9.4% spike in 2022.

CBRE has trimmed its forecast for Core CBD Grade- A rents to a 1% y-o-y increase from the previous forecast of 4%-5% y-o-y. “The saving grace lies in the tight future supply,” says Song. “The softer market conditions in 2023 could also be an opportune time for occupiers to reset and reassess their office requirements.”

The URA Price Index for office space showed a 3.7% q-o-q price increase in 4Q2022, compared with a decline of 2.7% q-o-q the previous quarter. Transactions in 4Q2022 “comprised mainly smaller strata office units purchased by non-real estate companies or private individuals for own use or investment”, notes CBRE’s Song. “This could have propped up prices on a psf basis.”

Luxury watch seller Cortina Holdings purchased the entire fourth floor of 13,735 sq ft at 15 Scotts for $49 million ($3,567.5 psf) in October. This was followed by the November purchase of three strata units of 2,497 sq ft on the sixth floor of the nine-storey building by a Chinese investor, who paid $10.1 million or a record $4,028 psf. Two high floors at Springleaf Tower were purchased by Esteel Enterprise for $53.9 million ($2,510 psf), also in November.

In comparison, big-ticket sales for the office market slowed as fast-rising costs diminished yield spreads for institutional investors, adds Song.

With rising interest rates, the spread between yields and borrowing costs is at, or close to, “negative territory”, says JLL’s Tay. “We expect office assets to come under re-pricing pressure in 2023.”

Two major office projects in the Downtown Core will be completed this year. Guoco Midtown, with 770,000 sq ft Grade-A office space, received its Temporary Occupation Permit in January. It has achieved a pre-committed take-up rate of 80% to date, according to GuocoLand.

Central Boulevard Towers, with 1.26 million sq ft of Grade-A office space, is slated for completion in 3Q2023. It is about 30% pre-committed, with Amazon taking up 369,000 sq ft.

“Partially mitigating the effects of the new supply would be the removal of older office blocks for redevelopment,” says Lam Chern Woon, Edmund Tie head of research and consulting.

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