Singapore’s office market defied expectations to stage a strong and earlier than expected recovery in 2017. So what drove this turnaround?

To recap, 2017 started on a nervous note as Brexit and rising protectionism cast a dark shadow on Singapore’s trade-dependent economy. At that time, businesses were adopting a cautious stance, resulting in lacklustre demand for office space. Adding to the fatigue, only 30% of the 2.3 million sq ft of office space due for completion in the CBD was taken up. This continued the weakening of rents in 2017.

Surprisingly, CBD Grade A office rents made a turn at the corner of 2Q17 by growing at a remarkable rate of 9.4% over the following three quarters. The 2.3 million sq ft of office space completed in the year was more than 60% committed by December 2017, while net absorption of Grade A office space reached the highest level in two years in 2017.

So, what ticked in the Singapore office property market?

1.  A timely shift in demand

The digital and sharing economy led to the phenomenal growth of technology firms and flexible space operators. 2017 saw the entry and growth of technology companies such as Traveloka, Facebook, Meitu and LinkedIn. In the flexible space arena, operators such as JustCo, WeWork and The Great Room had expanded aggressively.

Additionally, fuelled by the sustained strong rebound in manufacturing and trade activity, Singapore’s GDP growth forecast for 2017 had continually improved. This bolstered business confidence and encouraged upgrading of space from companies such as Itochu, Winning Alliance and Sojitz into new premises.

Broad-based growth in demand helped to take up the slack in demand of financial institutions who were traditional drivers of office demand but have been weighed down by the implementation of regulatory conditions and compliance measures.

Figure 1: Change in employment across major office demand drivers
 Source: Singapore Department of Statistics

2.  Rising trend of forward leases

The competition for tenants amid large impending completions saw landlords of new buildings more open to signing tenants way ahead (two to three years) of the expiries of their existing leases. Occupiers were also willing to commit as they saw opportunities to relocate to spaces, with more efficient floor plates, decrease as the government limits CBD land supply in an effort to encourage decentralisation of office space.

The trend of forward leases resulted in the tightening of office space as both the occupiers’ existing premises as well as the newly committed space would be taken off the leasing market.

Conclusion

Broad-based growth in demand, coupled with the rise in forward leasing, contributed to the quicker than expected take-up of new office space. This boosted landlords’ confidence and spurred them to raise asking rents, thereby kick-starting the rents upcycle.

With pipeline supply tapering sharply in 2018 and drying up by 2019, CBD Grade A office rents look poised to stay on the growth trajectory until the next wave of supply comes on stream from 2020 onwards.

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