Office rents to soften next year on the back of record building completions: Savills Singapore

Despite the expectation of softening rents, Savills’ Cheong says “the overall outlook for 2023 should be a stable one supported by robust take-up numbers, sustained net absorption, limited new supply additions and continued leasing demand”.Savills’ Swan agrees, saying that landlords will likely remain selective of their tenants and prospects. “Scenarios such as tenants requesting a six-, or 12-month rental relief period for the duration of their leases should be negotiated on a case-by-case basis and take into account the tenant’s financial position and marketability,” he adds.A downward adjustment in rents is likely on the horizon as a tight supply of Grade A office space has been underpinning rental rates this year, according to an October report by Savills Singapore. The report is forecasting office rents to soften in 2024 following record levels of CBD and non-CBD building completions. Grade A offices in the CBD saw a higher vacancy rate of 7.1% as of 3Q2023, up 0.6 percentage points from the previous quarter.Savills Research is maintaining its projected growth of 2% y-o-y for CBD Grade A office rents in 2023, underpinned by the substantial reduction in net supply registered in 2022 that has consequently affected the market in 2023. The rents have risen by 1.1% for the first three quarters of the year.

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The market has seen indications of rental rates softening despite a lack of new supply in 2020, according to an October report by Savills Singapore. The report is expecting a further decrease in office rents in 2024 due to high levels of CBD and non-CBD building completions. Grade A office rental growth has seen a slowdown with average monthly rents edging up just 0.1% quarter-on-quarter in 3Q2023 to $9.64 psf.

CBD Grade A offices have had a higher vacancy rate of 7.1% as of 3Q2023, which is 0.6 percentage points more than the preceding quarter – this can be primarily attributed to the addition of Guoco Midtown to office stock. All areas in the CBD except for Raffles Place, Shenton Way, and the Beach Road-Middle Road area saw unchanged rents in 3Q2023.

Savills Research is, however, maintaining its projected growth of 2% year-on-year for CBD Grade A office rents in 2023. This is due to the reduced net supply registered in 2022, and the current 1.1% increase in rents in the first three quarters of the year.

The lackluster sentiment in the office market is likely to persist through 2024 according to Ashley Swan, executive director, commercial leasing at Savills Singapore, and this could result in a fall of between 2% and 3% year-on-year in CBD Grade A rents.

This is compounded by the influx of islandwide office supply expected next year – such as IOI Central Boulevard Towers, Keppel South Central, Paya Lebar Green and Labrador Tower. Alan Cheong, executive director, research and consultancy at Savills Singapore, cautions that due to rising business and global political risks, the new supply may not be enough to “convincingly turn rents around” once it drops sharply in 2025 and 2026.

Despite the expectation of weaker rents, Savills’ Cheong believes that the overall outlook for 2023 should remain stable due to sustenance in net absorption, limited new supply additions and continued leasing demand. Furthermore, landlords can be selective of tenants and prospects, where rental relief periods and other concessions should be negotiated on a case-by-case basis.