URA central office index up 13.1% by double office demand up

The Urban Redevelopment Authority’s Office Rental Index for Singapore Central Region increased by 0.3% in the last quarter of 2023.

This was a lower increase than the gain of 4,9% in Q3-2023. Office rental index rose 13.1% in total for 2023. This was after a growth of 11.7% during 2022.

URA figures released on January 26 showed that, for the fourth quarter of 2023, the office price index in the central area fell by 5.9 percent from the prior quarter. This was in contrast to an increase quarter-on-quarter of 0.8 percent in the third quarter of 2023. Office price index fell 4.2 % for the entire year 2023 after declining 0.1 % in 2022.

In Q4 202023, the net lettable surface area (NLA), which is the total amount of office space that has been occupied, increased by around 96.900 square foot (sq. ft). This was down from the increase 247.600 sq. ft. in the prior quarter. The islandwide vacancy rates for office spaces dropped from 10% to 9.9% at the end if Q4 2023.

Property researcher says that while the overall statistics point to a healthy Singaporean market with low vacancies, it also indicates a slowing down of demand as well as a moderating in rental growth.

URA data shows the net new demand for office space in Singapore, as measured in terms of the change in office space occupied, almost doubled in 2023 to about 893400 sq ft from 473600 sq ft. The Downtown Core is the main driver, with locations like Raffles Place Marina Bay Shenton Way.

Researcher noted also the growing gap between landlords’ expectations and tenants’. Landlords expect higher rents. However, tenants are increasingly resisting this trend. The market power will shift in the future quarters away from the landlords. As more primary and secondary properties come on the market and put pressure on rents, occupancy, and rental rates.

Property agencies expect the URA office rental index to grow at a slower pace in the Central Region, between 3 to 5 percent per year.

The forecasts are that the average gross rent value for their CBD Grade A office will grow at a more moderate rate of 1 to 3% for the full year of 2018, after increasing by 4.1 % in 2023, and 5.5 % in 2022.

Property analysts have also stated that the majority of office occupiers may be cautious when it comes to expanding. In 2024, headlines have been filled with retrenchment stories, particularly within the technology sector. The small increase in rental prices projected for 2024, in spite of the increased supply, can be attributed to tight occupancies in most office buildings.

This year, agencies forecast a rent drop of between 2 and 3 percent for their basket of Grade-A CBD office rents. In 2022, rents had increased by 2.2%. Cheong attributes the high cost base of operating in Singapore to, amongst other factors. Coupled with difficult business conditions, this may encourage companies to trim headcounts and reduce office space footprints in order to save cost.

The URA Central Region Office Rent Index 2023 showed a 13.1% increase over the previous year (mostly during the first three-quarters), which is much higher than most of the property consultants’ rental gains for CBD Grade B office baskets.

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A top analyst has suggested that the URA’s office rental indices may be computed using the lease commencement date. Property consultants might be recording rents based on the contract date, which could be earlier. Layoffs in tech were not as common in 2022-early 2023 as they were in H2-2023. It is possible that by 2024 the URA office rent index will start to stabilise, or even slightly decline, as the leases entered into in 2024 begin in 2025.

Analysts also noted that URA’s monthly median rental (based upon contract date) of Category 1 offices, which cover the better-quality office buildings in the City area, grew by 7.2 percent for the full year 2023. The rent for Category 2, the remaining office spaces in Singapore, rose only 6 per cent to S$6.04psf. The vacancy rates for Category 1 offices have fallen from 9.5 to 7.5 as of the end-2022.

In the search for better office space in better locations, occupants are continuing to seek out higher quality.

Office rents may continue to drop in the Central Region as a result of rebalancing supply and demand against a backdrop of high interest rate and additional supply. IOI Central Boulevard Towers will be completed in 2024. Labrador Tower is also expected to close in 2024. This new supply had been committed as of end-2023.

Office relocation and growth activities in central regions could increase in second half of 2020, as there will be more choices on the market. Capital expenditure restrictions may also ease with improved economic conditions. There could be a pent-up office demand. Some offices are getting more crowded as many people have kept the size of their office unchanged or even reduced since the pandemic.

Some observers have been left puzzled by the dramatic drop in URA’s Office Space Price Index in Q4 2023. Analysts said it might be because of price index changes resulting from differences in the attributes of units that were sold between Q3 and Q4 2018.