In 2019, the services producing industries registered a growth of 1.1% y-o-y, which was a slowdown from 3.4% in 2018. This was mainly supported by growth from the finance & insurance, business services, other services and information & communications sectors. At the same time, net company formation for office-occupying sectors shrank 7.6% y-o-y to 10,389 companies. The dwindling number of net company formations is indicative of lower demand for office space.
Islandwide office net absorption registered 1.08 mil sq. ft. in 2019, which was 31.9% lower than 2018. Based on Figure 5, net absorption moved broadly in tandem with GDP growth. Analysing both indicators in five year intervals, the 5-year historical average net absorption and 5-Year CAGR in GDP were comparatively stronger over the course of 2010-2014, before registering slower growths during the period of 2015-2019.
In light of economic uncertainties, business sentiments remain largely cautious. This may result in lower capital expenditures and more renewals
in 2020. Future demand will commensurate with the slower pace of economic growth, which is likely to result in an average net absorption lower than the 5-year historical average net absorption (Figure 5). Risks to regional supply chains were initially reduced with the signing of the Sino-U.S. ‘phase one’ trade deal; however, this has since been offset by the COVID-19 outbreak. As a result, this could potentially weigh on Singapore’s economic recovery, especially with projected GDP growth for 2020 revised to the range of -0.5% to 1.5%.
FIGURE 5: GDP GROWTH AND NET ABSORPTION
BACK TO BASICS LEASING DEMAND
SMALLER SPACE REQUIREMENTS
In 2019, the technology and agile space sectors were major features in leasing demand. However the rate of expansion has slowed, with the number of agile
space deals lower than that of 2018. Arguably, the agile space sector still accounted for a large proportion of leasing volume as it was inflated by the larger
average facility size (>30,000 sq. ft.) deals signed over the last 12 months. Stripping away these behemoths from overall leasing volume, bulk of the underlying leasing volume were deals less than 30,000 sq. ft. (Figure 6).
In 2020, only select agile space operators with strong corporate funding are likely to expand further. Instead, we could see traditional sectors stepping up such as firms in the finance, insurance, and technology industries, which were also sectors that spearheaded GDP growth in 2019. Leasing demand from the technology sector extends beyond just the big technology players. Increasingly, more small to mid-sized technology companies are contributing to leasing activity. This was spurred by Singapore actively taking steps to become an intellectual property and innovation hub, coupled with an active venture capital market that has supported the growth of several homegrown ‘unicorns’.
With the agile space sector easing off in take-up, office market demand will be more balanced in 2020. That said, based on CBRE Research’s basket of office
buildings, two in five office buildings have an agile space component which shows that most office buildings are already well-equipped to address any short-term changes in headcount from existing building occupiers. With such nimbleness, more small to mid-sized transactions are likely to emerge in the near term, instead of large deals above 30,000 sq. ft.
FIGURE 6: LEASING DEALS BY SIZE IN 2019
FLIGHT TO EFFICIENCY TO CONTINUE
MANAGEABLE SUPPLY PIPELINE
Over 2020 to 2023, 5.11 mil sq. ft. of future supply is expected to complete. Distributed on a 4-year annual average basis, this calculates to be 1.28 mil sq. ft. of new supply per annum, which is 28.0% lower than the 10-year historical annual average supply of 1.77 mil sq. ft. (Figure 7).
In 2020, 1.89 mil sq. ft. of confirmed islandwide office supply is scheduled for completion. Within the Core CBD, this includes the completion of AEI works at 55 Market Street, HD139, 30 Raffles Place, Afro-Asia i-Mark and 79 Robinson Road. The completion of Centrium Square, St James Power Station and Woods Square will see an addition of 0.76 mil sq. ft. of office supply to the Decentralised market.
In 2021, the known projected supply is 1.24 mil sq. ft. Projects in the pipeline include CapitaSpring in the Core CBD, the redevelopment of Hub Synergy Point in the Fringe CBD, Rochester Commons and Surbana Jurong Campus in the Decentralised market.
In 2022, new office supply in 2022 is estimated to be 1.98 mil sq. ft. The addition to office stock will primarily be Grade A stock such as Central
Boulevard Towers and Guoco Midtown, and One Holland Village from the Decentralised market.
FLIGHT TO EFFICIENCY
Looking at the office stock available in 2020, there is limited availability of buildings within the Core CBD that is able to accommodate large corporates
that seek to relocate into a single floorplate above 20,000 sq. ft. Of the five mentioned developments in the Core CBD, only 79 Robinson Road and part of 30 Raffles Place qualify for this requirement.
In 2021 and 2022, more Grade A developments with large efficient floorplates (ranging between 20,000 sq. ft. to 70,000 sq. ft.) are slated to complete.
This structural shift may motivate occupiers to move to these buildings. As a result, we may see more flight to efficiency movement over the next three years especially from occupiers who are seeking to consolidate operations.
FIGURE 7: HISTORICAL AND FUTURE SUPPLY (ISLANDWIDE)
RENTAL RESILIENCE EXPECTED
RENTAL RESILIENCE EXPECTED
The prospects of the office market look stable. After enjoying ten consecutive quarters of growth since the last trough in Q2 2017, rents for Grade A (Core CBD) office space expanded 29.1% to $11.55 psf/mth (Figure 8). This was underpinned by the shrinking vacant stock which resulted in vacancy compressing from 5.1% in 2018 to 3.9% in 2019.
Given the impending supply and emerging secondary space, vacancy levels are expected to trend upwards over the next couple of years. With demand levels expected to moderate further, some landlords are re-adjusting rental expectations to attract or retain tenants. This narrows the gap between landlords and occupiers, as the focus is primarily to fill up existing vacancy. This seems to indicate that the pace of rental increase is near its tail end. With limited new Grade A office supply expected in 2020, CBRE Research opines that average Grade A (Core CBD) rents have peaked and are expected to remain stable in 2020.
However, considering the patchy demand and several projects nearing completion, rents may face downward pressure from 2021 onwards. The lower rents may spur more pre-lease commitments, with movements driven by flight to efficiency. Leasing interest for developments expected to complete in 2020/2021 are gradually picking up. However, Grade A buildings in the Core CBD are likely to face stiff competition from the completion of quality office buildings located outside of the Core CBD. This is also expected to add pressure on rents.
Beyond 2022, there is no known new supply expected to enter the Grade A (Core CBD) market which will recalibrate the supply demand dynamics in the office market. Latent demand is likely to lend support to vacancy and rents.