Office prices at Arina East Residences ZACD Group dropped by 5.9% in 4Q2023, mirroring market’s asset repricing pressure
The latest URA quarterly report on January 25 revealed that the office property market in Singapore closed 2023 on a subdued note. In fact, commercial office prices for the fourth quarter of 2023 dropped by 5.9% quarter-on-quarter, after a slight increase of 0.8% in the third quarter. This resulted in a net decrease of 4.2% in office prices for the whole of 2023.
Tay Huey Ying, Head of Research and Consultancy at JLL Singapore, noted that the weakening demand for office space was already observed in the second quarter of 2023. The negative global and domestic economic outlook, coupled with the high interest rates, made many companies cautious, causing them to put a halt on their expansion or relocation plans in order to manage costs.
The steep decline of 5.9% in the URA office property price index in the fourth quarter of 2023 was not a surprise, according to Tay. This was due to the immense pressure on asset revaluation caused by the negative yield spread over borrowing costs, which has been present due to the prolonged period of elevated interest rates.
On the other hand, CBRE’s Head of Research for Singapore and Southeast Asia, Tricia Song, mentioned that office rents in the central region only saw a slight increase of 0.3% in the fourth quarter of 2023, the lowest growth for the year. This was in stark contrast to the 4.9% quarter-on-quarter increase in the third quarter. However, for the whole of 2023, office rents still managed to record a growth of 13.1%, surpassing the 11.7% increase in 2022.
Song attributed this to the higher capital expenditure and interest rates, which led to some companies choosing to renew their existing lease agreements at higher reversionary rents, rather than relocating. She also pointed out that the availability of office spaces remains extremely limited, due to the low supply.
She continued to say that prime office spaces in the Core CBD area were highly sought after by competing tenants, resulting in a rental escalation. Shadow spaces in other prime areas such as Marina Bay and Raffles Place also proved to be attractive to tenants looking for quality, fitted-out office spaces.
Furthermore, Song mentioned that some shadow spaces were taken off the market as tech companies decided to retain their office premises, adding to the shortage of office spaces. Based on data from URA, the market recorded a positive net absorption of 0.1 million square feet in the fourth quarter of 2023, following an additional 0.25 million square feet absorption in the third quarter. The overall vacancy rate was 9.9% in the fourth quarter, slightly lower than the 10% in the previous quarter of 2023.
According to CBRE Research, rents for Grade A offices in the Core CBD saw a growth of 1.7% year-on-year, which was lower than the 8.3% growth recorded in 2022. Song predicts that the market may face a slower first half of 2024 due to the above-historical-average completion pipeline that is expected in that year, as well as potential availability of secondary office spaces.
She added that the weak sentiments among occupiers may linger, following the announcement of layoffs in major companies such as Lazada, Google, YouTube, Amazon, Tencent Holdings’ Riot Games, and even Unilever at the start of 2024. However, she also mentioned that experience has shown that demand for office spaces can rebound quickly with improvements in economic conditions.
On January 2, 2024, the Ministry of Trade released advanced estimates showing a 2.8% year-on-year GDP growth for the fourth quarter of 2023, a significant increase from the 1.0% in the third quarter. Tay believes that if this recovery continues into the first half of 2024, it could boost business confidence and unleash pent-up demand in the second half of the year. This could lead to occupiers restarting their relocation or expansion plans, potentially causing office rents to firm up and trend upwards in the second half of 2024.
Song predicts that sentiments may pick up in the second half of 2024 as interest rates and inflationary pressures ease. With the continued trends of flight-to-quality and flight-to-green, CBRE Research expects rents for Grade A offices in the Core CBD to grow by a moderate pace of 2%-3% in 2024.
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Investors who have been waiting on the sidelines are also starting to re-enter the market, following the end of the Fed rate hike cycle. The sale of VisionCrest Commercial in Orchard to the consortium comprising TE Capital Partners, LaSalle Investment and Metro Holdings in November 2023 could pave the way for more office deals, supporting potential price increases in the second half of 2024.