Downside risk for prime office space

As the number of confirmed Covid-19 cases grows exponentially and more countries implement strict lockdowns, the economic blow to businesses globally will start to take its toll on Singapore's Grade A office market.

For now, landlords have been able to hold their rents steady owing to tight vacancies and limited upcoming supply in the near term. This was despite lower market confidence.

An annual average of 700,000 sq ft of new projects will be completed from now to next year. This is 42 per cent lower than the historical average of 1.2 million sq ft of new supply injected annually over the past decade.

The supply crunch will ease only in 2022 when 1.9 million sq ft of prime space from Central Boulevard Towers and Guoco Midtown are completed.

Although only a few new projects are completing over the next couple of years, pre-leasing activity has been slow. Landlords of buildings under construction have been holding rents firm to take advantage of the rental upcycle at the expense of higher pre-commitment rates.

Asking rents have been in the double digits for the new buildings, but they are barely edging up due to the rapid deterioration of market confidence in the last couple of weeks. With the office rental cycle already peaking, it remains to be seen if landlords of these upcoming projects will take decisive action to boost occupancy rates in time.

Global economic and geopolitical uncertainties are taking a toll on the ability of companies to secure budgets for relocation and expansion, limiting the demand for office space. Those severely impacted by the Covid-19 situation could soon embark on space rationalisation and streamlining of manpower costs, which will result in more space being returned to the landlords. While office-using employment is expected to grow at a slower pace over 2020 to 2021, office leasing demand will continue to be driven mainly by finance, technology and co-working.

Unlike other cities where co-working operators are downsizing, the co-working sector in Singapore is stable. It has become the norm for all new projects to include a sizable co-working component. For instance, The Great Room has taken up 26 per cent of the total space in Afro-Asia i-Mark, which is completing this year.

The Covid-19 outbreak has also increased demand for alternative office locations to implement a business continuity plan. While the short-term demand for co-working remains healthy, it is still questionable how co-working operators will react and adjust their offerings and incentives, should the broader office rental market start to falter.

With tenants finding it convenient to have a co-working space located in the same building to use for swing space, new co-working spaces in the upcoming projects will help to drive leasing demand over the next few years.

The Covid-19 epidemic has turned into a global pandemic, with high numbers of infections and deaths worldwide. A double impact of a global recession and a local recession is likely to occur.

This would result in Grade A CBD rents moderating by approximately 10 per cent in 2020 with a further decline in 2021.

The stimulus provided by the supplemental Resilience and Solidarity Budgets will mitigate some of the economic downside expected. Nevertheless, with mounting evidence that the impact of the global pandemic could exceed that of the global financial crisis, landlords should brace themselves for a larger decline if the economic situation continues to deteriorate.

As the Government closes all workplaces except for essential services between April 7 and May 4, we expect occupiers to further delay their decision-making in new leases up until the end of the second quarter.

Office leasing demand could take a further hit if the United States-and Europe-headquartered MNCs take a step back on the appetite for expansion space, due to the lockdowns in their respective countries, which in turn are slowing down the business activities significantly.

Nevertheless, with Covid-19 cases easing in China, we are beginning to see renewed inquiries by Chinese firms, which may be an indicator that activity levels may resume over the remaining quarters of this year.

Post-2021, office rents are projected to recover, as Singapore remains an attractive destination for regional headquarters.

Source: Straits Times, 12 April 2020