Core CBD (Grade A) leading the office market

On the back of healthy building occupancies and continued flight-to-quality, the office market has remained resilient and positive during the quarter. According to CBRE Research, vacancies in Core CBD (Grade A) inched down further to 3.9% in Q1 2023 from 4.2% in Q4 2022 as supply remained tight. On the rental performance front, gross effective rents for Core CBD (Grade A) increased by 0.4% q-o-q to reach $11.75 psf/mth, moderating from the 0.9% q-o-q increase recorded in the previous quarter. That said, persistent global tech layoffs, which started in November 2022, and the fresh global banking sector turmoil since early March, has been weighing on market sentiment. This was evident in the slower rate of rental increase in Q1 2023.

Leasing demand remains healthy, while shadow space to grow

Mr David McKellar, Co-Head of Office Services, Singapore, CBRE, said, “While tech demand has been muted, we continue to see leasing activity from professional services, FMCG and government agencies as these sectors are still experiencing headcount growth due to positive fundamentals in the market. With good quality office buildings still enjoying low vacancy rates, small to mid-sized occupiers have been compelled to take advantage of such restricted opportunities.”

That said, the amount of shadow space is expected to remain elevated as cost containment continues to be a key feature for tech firms. Besides the estimated 0.7 mil sq. ft. of shadow space in the office market, another 0.4 mil sq. ft. of shadow space exist in other types of spaces, such as business parks and hi-tech space as well. The technology sector alone accounts for approximately 80% of all shadow space, an increase from 64% that was reported in Q4 2022. With cost cutting exercises from the tech sector not expected to ease off anytime soon, the amount of shadow space could potentially increase further in the coming quarters.

Mr McKellar adds, “The emergence of such space presents opportunities for occupiers seeking to upgrade, as quality office space has historically been tightly held. Tenants who are inclined to reduce their footprint to suit a hybrid workplace model can take this chance to upgrade to smaller but higher- quality premises.”

Concerns surrounding the global banking sector have also escalated in March, with the collapse of Silicon Valley Bank and the UBS takeover of Credit Suisse. According to MAS, Singapore’s banking system remains resilient, and the stability in the local financial markets is unlikely to be impacted. Singapore continues to maintain its safe-haven status for investors on the back of its track record as a key financial and wealth management hub. Leasing demand from non-banking financial institutions and family offices had remained healthy in Q1 2023. It was reported that another 200 single-family office (SFO) and one multi-family office (MFO) applications are pending approval, according to Senior Minister Tharman Shanmugaratnam on March 20.

Forecast

Ms Tricia Song (宋明蔚), Head of Research, Southeast Asia, CBRE, concludes, “Increased volatility in the financial markets could weigh on an already cautious sentiment in the near term. That said, the silver lining lies in the limited supply of good quality offices in the medium term which will help cushion the overall market.”

CBRE Research maintains its earlier rental forecast for 2023, with Core CBD (Grade A) rents to remain relatively flat, before recovering more meaningfully in 2024.