URA Central region office index increases 13.1% in 2023. Islandwide net office demand is expected to nearly double by 2023.
The Urban Redevelopment Authority (URA) index of office rentals for Singapore’s central area 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 islandwide office vacancy rate dropped to 9.9 percent from 10.9 percent at the end Q3 2023.
The overall statistics show a strong Singapore office market, with a tight vacancy rate. However, they also indicate slowed demand and a moderated rental growth.
The growing gap between the expectations of landlords and tenants. Tenants are increasingly resisting higher rents, even though landlords still expect them. This is especially true in this weaker economy. 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.
Colliers predicts that the URA office rental index will grow between 3 and 5 percent per year in the central region by 2024.
After rising by 5.5 percent in 2022 and 4.1 percent in 2023, the average gross effective rental value of its CBD Grade A Office Basket will grow at a more moderate rate of 1 to 3 percentage points for this entire year.
The majority of 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.
The URA indexes for office rentals are calculated based on the date of the lease start. Property consultants may be recording rents as of the date 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.
Savills predicts a 2 to 3 percent rental decline for Grade A CBD office rentals this year. Last year, rents increased by 1.1 percent, and 2.2 percent in 2022. Cheong attributes the high operating costs in Singapore among other factors. This, coupled with the challenging business environment may cause companies to reduce headcounts or office space footprints to cut costs.
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), rose by 7.2 percent for 2023, to S$11.52 psf, surpassing the 6 percent rent increase for Category 2, which covers the rest of Singapore’s office space, to S$6.04psf. The Category 1 office vacancy rate has dropped to 7.5 percent as of end-2023, from 9.5 percent at the end of 2022.
The flight to quality continues
“A flight to quality is continuing as occupants continue to look for better-quality and more conveniently located office space. However, they may adopt hybrid working arrangements that reduce their footprint.”
Office rents could slow down in the central region this year as the supply and demand balance out against the backdrop 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 2.3 million square feet of new office space. He noted, however, that approximately 43 per cent (or 2.3 million sq ft) of the new office stock had been committed by end-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 have increased in size due to an increase in office usage.
Some observers were baffled by the substantial drop in URA’s price index in Q4 of 2023. This could be due, according to one explanation, to the price index fluctuations caused by different attributes of units that were sold in Q3 compared with Q4 last year.