Office rents in 2021 could recover to 2019’s levels

Office rents to grow 5.5% by the end of 2021, on an eventual economic rebound and benign supply (image: Colliers International)

Colliers International has published its latest research report which examines the performance of the Singapore office property market in Q4 2020 and its prospects ahead.

Office Rents

Evaluating the data, Colliers International Research notes that CBD Grade A gross effective office rents continued to moderate further by 2.1% QOQ to SGD9.57 per square foot in Q4 2020 and represents a 5.4% decrease for the full year.

Ms Tricia Song, Head of Research for Singapore at Colliers International, added, “The prime office market has been relatively resilient considering we went through the deepest recession since independence. Going forward, market dynamics are conducive for a recovery towards end-2021. We forecast CBD Grade A rents to rise 5.5% to SGD10.09 (USD7.63) per sq ft.”

This recovery can be justified with the alignment of several factors. Firstly, Oxford Economics forecast a positive GDP growth of 5.6% for 2021. Secondly, new office demand will continue to be driven by the technology sector and the overall business recovery. Thirdly, supply levels are benign in 2021-2022 (average annual expansion at 2.6% of stock versus 4.7% for the last five years). Consequently, the expected positive net absorption should tighten vacancy before the next supply hike in 2023. Finally, redevelopment plans will further reduce the Central Business District’s (CBD) stock.

Ms Song added, “Among the Grade A micro-markets, Shenton Way/Tanjong Pagar has the highest potential for rising rents as it is best positioned to benefit from the CBD incentive schemes and undergo rejuvenation. The longer-term Greater Southern Waterfront development nearby could further uplift the precinct.”

Ms June Chua, Executive Director, Head of Tenant Representation, said: “2020 was a favourable year for occupiers, providing them with opportunities to renew leases at lower rents, while landlords are more willing to negotiate and offer higher incentives. There is still a short window of opportunities for Occupiers who want to lock in their leases before rents increase. Larger occupiers should continue rationalising their space requirements and alternatively adopt a flex-and-core or split-office strategy.”

Office rents and vacancy, Q4 2020

Investment sales

Total office or mixed office investment volumes grew more than 10 times QOQ to SGD10.3 billion in Q4 2020, driven by the merger of CapitaLand Commercial Trust and CapitaLand Mall Trust. This brings the full year transaction sales volume to SGD13.2 billion, up 73% YOY.

Mr Jerome Wright, Senior Director, Capital Markets and Investment Services in Singapore at Colliers International, said, “While it was a record year for deals, transaction volume fell 61% YOY in 2020 when all REIT mergers in the year are excluded. Nonetheless, last year’s transactions highlight Singapore’s long-term attractiveness to foreign investors and appetite for rare freehold buildings. Over the next few years, we remain optimistic for capital market volumes on a favourable interest rate outlook and capital allocation to Asia’s key gateway cities.”