A two-tier office market is emerging in Singapore

The Grade A market displayed resilience whilst the Grade B market grappled with higher vacancies.  

According to CBRE Research, preliminary estimates for  Q1 2021 office market indicators have begun to show some signs of recovery,  with positive net absorption and tightening vacancy. The recovery was led by  Grade A office buildings which were the main beneficiaries of leasing demand. 

Flight to quality leading to a two-tier market 

There has been more flight to quality movements, as occupiers focus on the  higher quality products within the Central Business District (CBD). This resulted in  the emergence of a two-tier market – the Grade A (Core CBD) market displayed  resilience with tightening vacancy, while the Grade B (Islandwide) market  continued to grapple with higher vacancy rates (Table 1).  

Table 1: Office Market Vacancy Rates 

Source: CBRE Research 

Supported by the fairly tight vacancy in the Grade A (Core CBD) market, the  rental decline was arrested after four consecutive quarters of correction. Based  on the Grade A (Core CBD) basket tracked by CBRE Research, office rents  remained stable q-o-q at S$10.40 per sq ft per month in Q1 2021. Conversely, the Grade B (Core CBD) rents registered further rental decline of 1.3% q-o-q to S$7.80  per sq ft per month.  

Leasing momentum gaining traction 

After three consecutive quarters of negative net absorption, the office market  registered a positive net absorption of 0.13 million sq ft in Q1 2021. This stemmed  mainly from Dyson Limited’s lease commitment at St James Power Station which  was added into total office stock in Q1 2021.  

In the past six months, CBRE Research noted an uptick in leasing momentum as  Singapore remains on the radar of many large multinational companies. In  particular, the Grade A (Core CBD) market registered a positive net absorption in  Q1 2021, as occupiers capitalised on the declining rents and took flight to prime  office buildings. Key demand drivers included firms in the technology and  financial services industries such as asset management firms, and to a smaller  extent, family offices. 

In addition, the displacement of tenants from buildings that are scheduled for  redevelopment such as AXA Tower and Fuji Xerox Towers have contributed to  occupier activity over the past few months. This includes Alibaba Group and  Lazada’s relocation from AXA Tower to 5One Central. In addition, ByteDance  continued its growth plans in Singapore, with its latest new take-up in Guoco  Tower.  

Although there remain concerns around the existing pool of secondary space,  healthy take-up of secondary space within the Core CBD has indicated that  interest for such fitted out space remains strong.  

Modest recovery for the office market 

Catherine He, Associate Director of Research, Southeast Asia, says, “There is  optimism surrounding the mid-term outlook, as prospects of the office market  remain healthy. Over the course of 2021, office demand is expected to be  supported by gains in employment and a gradual recovery of Singapore’s  economy. In addition, office rents will be supported by a tight supply pipeline.” 

In the absence of commercial government land sale sites with an allowable  office use in the CBD, there is limited availability of new supply over the mid-term.  Factoring in the likely removal of existing stock stemming from buildings that are  scheduled for redevelopment such as AXA Tower, Fuji Xerox Towers, Central Mall,  Faber House, this will offset the incoming supply over the next three years. 

Nonetheless, it will not be a uniform recovery across all office buildings. The Grade  A market is expected to be the main beneficiaries through the market recovery  phase, as large corporates leverage on the short-term market pull-back to  upgrade in location and quality. Meanwhile, the Grade B market is likely to face  further pressure from emerging vacancy.  

David McKellar, Co-head of Office Services, CBRE Singapore, says, “A silver lining  for the office market is the government’s latest announcement that work-from-home is no longer the default and up to 75% of employees are able to return to  the workplace with effect from 5 April 2021. This bodes well for the office market  as more firms are gradually planning for the return of employees to the workplace  and this reinforces the importance of the physical office.”