Office rents in Central Area cave in to pressure from a COVID19-led economic recession

Singapore’s office property market weakened in 2Q20 and is expected to stay subdued in 2H20 amid expectation of a protracted battle against COVID19 suppressing economic growth.

July 29, 2020

The Urban Redevelopment Authority’s (URA) 2Q20 real estate statistics released on 24 July showed vacancy rates rose and net absorption contracted across all regions.

In fact, island-wide net absorption shrunk by a record 55,000 sqm in 2Q20, with the bulk taking place in Downtown Core as a result of HSBC Bank‘s relocation from 21 Collyer Quay to Marina Bay Financial Centre Tower 2 in April 2020. 21 Collyer Quay has since been temporarily removed from stock for refurbishment, and its new tenant, WeWork, is scheduled to move in only in 2021.

Although URA’s headline office rental index held steady in 2Q20, delving deeper showed that the office rental index for Central Area fell 2.3% q-o-q after holding relatively firm in 1Q20 with a 0.3% q-o-q rise.

This is in line with JLL’s ground observations that the average monthly gross effective rents of Grade A CBD office space eased a faster 3.0% q-o-q in 2Q20, to SGD 10.48 per sq ft, following a marginal correction of 0.1% q-o-q to SGD 10.80 per sq ft in 1Q20. For 1H20, JLL’s CBD Grade A rent corrected a moderate 3.1% from 4Q19 level of SGD 10.81 per sq ft.

Leasing activity grounded to a near halt in 2Q20, hindered by the inability to conduct physical viewings in most part of the quarter due to the circuit breaker measures and phased re-opening of the economy. Given downcast outlook, most occupiers also chose to hold back relocation and expansion plans to avoid incurring capital expenditure. To entice tenants to renew or commit to new leases, landlords have become more accommodating to tenants’ request and generous on incentive offers.

As the economic fallout from COVID19 sinks deeper and widened in its spread, we expect rent correction to intensify in 2H20, bringing full-year CBD Grade A rent correction to around 12%. Rent could potentially bottom in 2H21 and recover by 2022 assuming economic recovery alongside the successful management of the spread of COVID19 globally and domestically.

On a positive note, the current market downtime is spurring redevelopment interest in the CBD which, if it materializes, could help to rebalance demand with supply and aid in office sector recovery. Displaced tenants looking for replacement work premise would help in space absorption, while demolitions and potential construction delays due to COVID19 will moderate supply growth. In the medium-to-longer-term, a refreshed CBD will sharpen Singapore’s edge as a global office hub.