Office and retail rental market: The competition between old and new

GSH PLazaIn the commercial property market, the effects of demand and supply is more strongly felt that ever as many new developments enter the market in line with the government’s efforts to grow and restructure the country’s commercial sector.

The positive outlook and sentiments in the private property market here does not seem to have rubbed off in the commercial sector as office rents fell 3.4 per cent in Q1 and retail rents fell 2.9 per cent – its 9th consecutive quarter of price declines. Prices of office spaces also fell 4 per cent in the first quarter of the year, following the 0.6 per cent fall from last year’s Q4. The numbers do not reflect the 2.5 per cent expansion of Singapore’s economy in the first quarter of the year, largely boosted by manufacturing and other trade-dependent sectors.

MarinaOneOfficeOther than Marina One which found tenants quickly, landlords of older commercial establishments are finding it increasingly difficult to compete with the newer offerings and have found themselves having to drop their prices in order to source for more tenants, even as more companies are relocating into cheaper and newer buildings outside of the core central region. Some companies are also exploring co-working options, which decreases the demand for commercial real estate on a permanent basis. New commercial buildings such as GSH Plaza and Guoco Tower will also increase the supply of prime office spaces in the Central Business District (CBD) and as these landlords are already raising their asking rents for Grade A office spaces, property analysts are expecting the country’s economic growth to fuel the commercial property market as the year moves on.

Positive 2017 outlook for retail and office property sector

Despite falling rents for retail and office spaces, analysts are hopeful for a positive performance from this market segment in 2017.

MarinaOneOfficePhoto credit: www.marinaone.com.sg

The last quarter of 2016 saw office rents falling 1.8 per cent, bringing last year’s decline of rental prices to 8.2 per cent. Rents for retail spaces fell 1.2 per cent in Q4, bringing the total year’s decline to 8.3 per cent. Surprisingly, despite a weakening economy and competition from e-commerce, the demand for retail spaces have picked up. Analysts put the easing of pressure on the retail property market to the development of many flagship stores, large food and beverage clusters and gyms. New retail brands and concepts entering the market meant there were tenants willing to take up larger floor areas in prime spots. That said, almost 169,000 sq metres of retail space will become available this year, and there may still be challenges ahead for this sector.

DuoTower

Photo credit: www.duosingapore.com

In the office property front, following announcements of major tenancy deals such as Facebook taking up prime office spaces in Marina One and similarly Distrii, a co-working operator, at Republic Plaza, the market is beginning to stabilise. New and massive working spaces will however add to the inventory soon, taking Duo Tower in Bugis as an example. It was completed last month and has pushed office vacancy rates to 11.1 per cent. Moving ahead,  property players are expecting office rents to continue softening at least for the first half of the year, though newer buildings such as Guoco Tower and Marina One have enjoyed positive take-up rates last year.

Office leasing market recovery expected in 2018

AXATowerWith predictions of prime office rents recovering in 2018, could this be the year to invest in commercial properties, in particular Grade A office spaces?

Despite fewer commercial spaces being released and slight holdbacks from tenants in the leasing market – office rents have fallen 20 per cent since 2015 – property analysts are still hopeful for a 3 per cent overall rental growth in prime Grade A office space, mostly in the Central Business District (CBD). The rebound in rental prices is expected to happen in the later half of 2018, with stabilisation possibly occurring even earlier.

At the moment, average monthly rents of an office space in Marina Bay hovers around $9.05 psf, followed by $8.72 psf in Raffles Place, $8.42 psf at City Hall and $7.86 psf in ShentonWay and Tanjong Pagar. The weakening oil and gas sector has put pressure on businesses and affected market sentiments all round.

SouthBeach3
Photo credit: www.southbeach-sb.com

But with announcements of multi-national companies such as Facebook moving into the Marina Bay area and upcoming city fringe developments such as South Beach giving more traditional office districts a run for their money, 2017 could be the time to pick off potential units which may be affordable options when rents do rise come next year. The next wave of new office spaces which will enter the market is projected for 2020 and 2021.