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Oversupply causes rapid decline in Singapore office rents
Office rentals in Singapore are continuing to slide, recording their fifth consecutive quarterly dip earlier this year. Buildings are becoming increasingly vacant as rents weaken, and the commercial property industry is noticeably softer recently – so where are all the prospective tenants going, and what does this mean for the landlords of Singapore office space?
First quarter research by Savills Singapore reveals the 2015 vacancy rate for Grade A office space grew 1.1% year-on-year from 3.7% in 2014. Much of this decline can be attributed to the shadow space created by big businesses such as banks, and companies in the marine, oil, gas and chemical industries.
Lower commodity price, falling global demand and the slowdown of the Chinese economy have all muted business confidence recently. If that hasn’t forced some companies to withdraw their physical presence in the region, it’s certainly deterred them from expanding and taking up extra office space.
The onus is also on landlords to balance the need between supply and demand, and avoid making their target audience too narrow from the start. Of seven areas sampled by Savills, Grade A office space in Marina Bay was the most expensive with an average cost of S$12.04 per square foot in the fourth quarter of 2015.
Marina Bay’s chic and modern offices were originally aimed at banks and other money-backed businesses. But the recent woes of the financial industry are one of the reasons Marina Bay had a vacancy rate of 7.1% in late 2015, and the smaller businesses who could fill the gap may have found themselves priced out of the chic luxury Marina Bay offers – especially when perfectly usable office space can be found for a more affordable S$7.56 per square foot in Beach Road/Middle Road territory.
Despite downward trends, there have been some pleasant surprises in Singapore office space usage. Notably, IBM took over three floors of the Marina Bay Financial Centre Tower 2, totalling more than 75,000 square feet, as part of a surprise relocation of their Asian headquarters from Shanghai. In the same building, LinkedIn grew its premises by leasing another entire floor.
Although this growth is at a slower pace than previous letting speeds, and came at the loss of miners BHP Billiton who previously occupied the aforementioned four floors, it’s still promising news. But what about the small businesses? Singapore was estimated to have over 40,000 registered startups in 2015, all of whom need to operate from somewhere.
Research has revealed there is an inequality between the needs of small businesses and the demands of large landlords. Typically, small and medium enterprises need no more than 500 square feet, but the majority of office buildings require a minimal take up of 2,500 square feet. Furthermore, landlords’ perceptions of small and medium enterprises sees them valued as inferior to larger businesses, which they would rather pursue as tenants.
So where are SMEs heading when they are priced out of traditional commercial property?
Co-working spaces on the rise
Source: Thinkstock/Getty Images
The answer lies in co-working – the new practise of sharing a working space that has flourished in Singapore in recent years. Co-working is appealing not only as a financial advantage for the businesses involved, but also for networking opportunities, working collaborations and fusing an environment of like-minded individuals.
Despite the success and potential scope for co-working, it’s advisable for landlords to still keep solo SMEs in their sights. Establishing connections with businesses while they’re young can lead to dual growth, as landlords can then cater to firms as their business and office space needs develop. Some landlords might take the opportunity of co-working to rejuvenate dated but otherwise usable office space that currently lies uninhabited.
Commercial vacancies in Singapore are predicted to rise again, growing from 7% to around 10%. This is partly due to companies in finance, commodity and chemical industries, who have recently taken been severely financially hit for several reasons but have not yet fully reflected this in their real estate footprint.
As the effects trickle down over the next year, the true state of commercial rents will come into focus. However, despite this, it is expected that capital levels will remain steady as landlords start to cater to the idea of co-working and more radical approaches to office space. This includes Singapore’s partnership with Microsoft to run a two-year pilot which will see the Internet of Things used to transform 30 commercial buildings into so-called Smart Buildings responsible for tracking energy consumption.
Elsewhere, The Hub Singapore, one of the largest co-working spaces in Singapore, just opened its second facility as this collaborative approach to office space is embraced. Its success is inspiring for those that have spotted the market niche. Commercial property will have to move with the times to attract tenants as a new era of renting arrives.
(By Sarah Thorp)
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