URA office index increases 13.1% in 2023. Demand to double

The Urban Redevelopment Authority (URA) index of office rentals for Singapore’s Central Region rose by 0.3 percent in the fourth quarter 2023 compared to the previous quarter.

This was a smaller increase than the 4.9% gain in Q3 of 2023. The office rental index increased by 13.1% for the entire year 2023 after growing 11.7% in 2022.

URA data published on Friday (Jan. 26) showed that office space prices in the central region decreased 5.9 percent in Q4 2023 compared to the previous quarter. This is in contrast with an increase of 0.8% quarter-on quarter in Q3 2023. The office price index for 2023 fell by 4.2 percent after falling by 0.1 percent in 2022.

In Q4 2023 the amount of office space occupied increased by 96,900 sq ft (sq ft), compared to the 247,600 square ft increase in the previous quarter. At the end of Q4 2020, the island-wide office vacancy rate dropped to 9.9% from 10% at the end Q3 2023.

The property researcher stated that although the statistics show a strong Singapore office market, with a tight vacancy rate, they also point to a slowing in demand and a moderated rental growth.

Researchers also noted that the gap between expectations of landlords and tenants is widening. Tenants are becoming more resistant to landlords’ demands for higher rents, even though they still expect them. This is especially true in this current economic climate. In the coming quarters, however, the power of the market may shift from the landlords to tenants as more primary and second-hand spaces enter the market. This will put further pressure on rents and occupancy.

Property agencies predict that the URA’s central region office rental index will moderate its annual growth to between 3 and 5 percent by 2024.

The average gross monthly rental value of its CBD Grade A Office Basket is expected to grow by 1 to 3 percent for the entire year. This follows a growth of 4.1 percent in 2023 and 5.5% in 2022.

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Analysts also noted that office occupiers will likely remain cautious about expanding. 2024 began with headlines of retrenchment, particularly in the technology industry. Rents are expected to grow slightly in 2024 despite the influx of new supply. This is because most buildings in this sector have a high occupancy rate.

Most property consultants’ CBD Grade A office rental baskets reflect gains of only a fraction of the 13.1 percent increase for the full year in URA’s central region office index 2023.

One top analyst suggested that one explanation for the disparity could be the fact that URA office rental indexes are calculated based on lease commencement dates. Property consultants may be recording rents at the time the lease contract was signed, which is earlier. The chatter about layoffs within the tech industry was less loud in 2022 and early 2023 than it was in H2 of 2023. This could indicate that the URA index for office rentals may begin to stabilize or even decrease slightly in 2024 as leases signed in 2024 are due to start in 2025.

Property agencies predict a 2 to 3 percent rental decline for their Grade A CBD office basket this year. Last year, rents increased by 1.1 percent, following a 2.2% increase in 2022. Cheong mentions, among other things, the high operating costs in Singapore. This, coupled with the challenging business environment, may cause companies to reduce headcount and office space footprint in order to save money.

URA data show that the islandwide net demand for new offices, measured by the change of occupied office spaces, has nearly doubled from 473 600 sq ft to 893 400 sq ft by 2023. This is largely due to the strong demand in the Downtown Core, which includes locations like Raffles Place Marina Bay and Shenton Way.

Analysts noted that URA’s median rental for Category 1 (covering better-quality offices in the city area), based on the contract date, rose by 7.2 percent for 2023, to S$11.52 psf, surpassing the 6% rent increase for Category 2, which covers the remainder of office space in Singapore, to S$6.04psf. The Category 1 office vacancy rate has dropped to 7.5% as of end-2023, from 9.5% at the end of 2022.

The flight to quality is continuing as occupants continue to look for better-located and higher-quality office space. However, they may adopt hybrid working arrangements to reduce their footprint.

Rents for offices in the central region may continue to fall as the supply and demand balance amidst high interest rates and increased supply. IOI Central Boulevard Towers and Labrador Tower, both of which are expected to be completed in 2024, together with a possible build-up in secondary spaces in existing buildings, will add up to about 2.3 millions sq ft in new office space. The new supply was pre-committed at the end of 2023.

A second positive could be that the number of office relocations and expansions in the central region may increase in the second half 2024. This is due to the fact that there are more options on the market, and the better economic conditions will allow for a possible easing of the capital expenditure restrictions. The pent-up need for office space could be increasing. Many occupants have maintained their office footprints or reduced them since the pandemic. However, as more people are returning to offices and some occupying those spaces, certain offices become crowded.

Some observers were baffled by the significant drop in URA’s price index in Q4 of 2023. Analysts suggested that it may be due to fluctuations in price indexes resulting from different attributes of units purchased in Q3 compared to Q4 last year.

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