Commercial office prices drop 5.9% in the 4th quarter of 2023 amid asset repricing.
URA’s quarter report, released on January 25, showed that Singapore’s commercial property market ended the year 2023 with a tepid note. Commercial office prices in 4Q2023 fell 5.9% from quarter to quarter, reversing a 0.8% increase in 3Q2023. Office prices decreased by 4.2% during 2023.
JLL began to notice a decline in occupant demand as early 2Q2023. Head of Research and Consultancy at JLL Singapore. As the global and domestic economy slowed down at the beginning of the year and interest rates remained high, many corporations resisted expansion plans and relocated to cut costs.
It is not surprising that the URA Office Property Price Index fell by 5.9% in 4Q2023 after three consecutive quarters with a lacklustre increase. This was due to the enormous asset repricing stress created by the negative yield spread on borrowing costs of most office assets during the extended high interest rate environment.
Tricia Song is the CBRE’s head of research in Singapore and Southeast Asia. She notes that office rents in Central Region grew just 0.3% q-o q in 4Q2023, which was the lowest quarter-on-quarter growth in 2023. Office rents increased 13.1% for the entire year in 2023. This was faster than the 11.7% growth in 2022.
Song says that some tenants chose to renew their leases with higher reversionary rentals due to the increased capital costs and interest rates. They did not relocate. She says that the space is “extremely limited due to a limited supply”.
Song says that the competition for premium office spaces with high-quality specs in the Core CBD led to a rise in rental rates. She says that shadow space in prime locations such as Marina Bay or Raffles Place was attractive to occupants looking for high-quality, fully-equipped office spaces.
According to Song, tech occupiers chose to keep their offices, which contributed to the shortage. According to URA data and the lack of available supply, the market experienced a net positive absorption of 0.1m sqft. This follows the 0.25m sqft additional absorption in the 3Q2023. In 4Q2023, the island’s vacancy rate was 9.9%, down from 10% in 3Q2023.
CBRE Research notes that the growth of CBD Grade-A rents has moderated from 8.3% in 2022. The market could face a slower 1H2024 due to an above-historical completion pipeline and the potential for secondary spaces. This could lead to a temporary rise in availability of space.
With layoffs announced by giant companies such as Lazada and Google at the beginning of the year, it is likely that the soft occupier sentiment will persist. The demand for office spaces can quickly rebound when economic conditions improve.
According to estimates released by the Ministry of Trade, Singapore’s economy is showing signs of a recovery. The Ministry of Trade estimated that Singapore’s GDP will grow 2.8% year-on-year in 4Q2023 compared to 1.0% in 3Q2023. This recovery could continue into the first half of 2024, which would boost business confidence and release pent-up demand for 2H2024. Occupants who delayed relocation or expansion plans for 2023 may now be ready to start new lease negotiations. If this happens, rents for offices could rise in 2H2024.
CBRE’s Song believes that sentiment could improve in 2H2024, as inflation and interest rates ease. CBRE Research predicts that Core CBD (Grade A) rents will grow moderately at a rate of 2% to 3% in 2024, as flight to quality and flight to green trends continue.
With the Fed’s rate-hike cycle ending, investors who have been waiting to enter the market are now doing so. The sale of VisionCrest Commercial to a consortium consisting of TE Capital Partners LaSalle Investment Metro Holdings, in November 2023, could pave way for other office deals, supporting asset price increases by 2H2024.