Offices empty

Demand for high-end units eases, agents say rents likely to fall

WITH banks around the world falling like nine pins, it’s not surprising that demand for top-quality Singapore office space is easing off.

The estate agents are agreed: Rents have already peaked, and occupancy levels are falling – with rents likely to follow.

According to a report by property firm CB Richard Ellis yesterday, Grade A rents stagnated in the third quarter at $18.80 per square foot per month, while prime rents were at about $16.10. Grade A refers to premium office space in top-quality buildings in places such as Orchard Road, Raffles Place, Tanjong Pagar and Marina Centre.

And there are now offices standing empty. Vacancies for Grade A offices rose to 1.2 per cent, up from 0.6 per cent in the first two quarters – the first time in two years that it has crossed the 1.0 per cent mark. “Landlords are adopting more reasonable asking rents, although in the immediate term occupiers will still face rentals that are at all-time highs,” the report added.

Chesterton International associate director Colin Tan told Today that while larger landlords have the option of maintaining current rents at the expense of occupancy rates, smaller landlords could be forced to lower their demands.

“Putting aside the financial meltdown, the supply is already more than enough,” said Mr Tan, who had previously argued that Singapore could face an oversupply of office space, with the authorities set to introduce more than 10 million square feet of space over the next five years.

While the pipeline of supply would bring rents down to more realistic levels, “the tendency is to overdo it”, he added.

Noting that no office development sites were awarded in the third quarter, CBRE added that it foresees “limited appetite for further speculative office development” amid the current environment where developers would also face difficulties in securing development financing.

CBRE expects rentals to fall early next year -bringing forward its earlier prediction that rents would soften only after 2010. But at the property firm Cushman & Wakefield managing director Donald Han felt that the high office rents would last until the second half of next year, given the tight market and the fact that multinational corporations have pre-committed to 25 per cent of the supply coming onstream.

Mr Han said that, generally, a vacancy rate of less than 5 per cent is considered “healthy”, while noting that the deepening financial crisis has resulted in banks “looking at cost-containment strategies”.

Analysts at Merrill Lynch – itself a bank which has been sold off in the crisis – said in a report that they expect Grade A office rents to drop to about$14 per square foot a month next year, and fall further to $10 in 2010. And that report was written in August.

Mr Han said: “The biggest question is how much demand will drop. We have to wait until the dust settles and smoke clears. But a reduction in rents can be seen in a brighter light. Companies might see Singapore as a more affordable location.”

Source : Today – 3 Oct 2008

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