News Analysis: Singapore's office demand expected to soften amid growing supply, falling demand

As office rent began to fall in the second quarter, analysts expected Singapore's office market to soften in the face of weak demand and rising supply.

After enjoying nine straight quarters of rise, Singapore's central business district (CBD) office rent suffered the first decline of 4.7 percent in the second quarter this year compared to the preceding quarter. Since its trough in the fourth quarter of 2012, CBD rent has risen 23 percent though this signified the smallest magnitude of recovery compared to the previous three up- cycles.

J.P. Morgan Research said the fall in office rent underscores the weakening demand of office space in Singapore. This is largely due to continued downsizing of financial institutions which have traditionally been the larger space-occupiers, as well as technology firms relocating to business parks. In addition, demands from trading, mining and commodities firms have also been impacted by falling commodity prices.

J.P. Morgan pointed out that on the demand side of Singapore office space, the banks have been trimming and consolidating operations in Asia, including Singapore, in light of global regulatory headwinds, slower deal flows from investment banking and higher capital requirements.

But the supply side is equally challenging. J.P. Morgan forecast the sizeable supply growth of 12.7 percent next year against merely 1.8 percent rise this year, exerting a significant upside risk to vacancies, which is expected to jump from 5.4 percent this year to 13.6 percent in 2016, before improving to 11. 4 percent and 10.8 percent in 2017 and 2018, respectively.

With the upcoming sizeable supply vying with landlords of existing buildings for new and renewal tenants, as well as weak leasing demand, J.P. Morgan expects office rents to fall 10 percent this year and another 15 percent next year, and foresees a recovery in 2017 due to economic growth and benign supply in that year to 2019. For now, landlords' top priority is tenant retention instead of raising the rent.

Nomura Research agreed that the headwinds in the Singapore office market are real, given that local media reported a further decline in hiring expectations among banking and financial services firms, with just 21.9 percent of the respondents planning to increase hiring in the second half compared to 56.3 percent a year ago.

But Nomura said that the office market's downside next year and beyond may not be as significant as market fears. The prime Grade A office rents have already started to fall in the second quarter almost 12 months before the new supply is expected to hit the market in the second half of next year. This could suggest less downside going into next year given this has now been front-loaded.

Nomura estimated the average office space per worker in the CBD area was 97 square feet as of the end of 2014, which appears low compared to the average 103 square feet since 2005.

Taking into account the 10.8 percent increase in CBD office stock by end of next year and assuming no change in the working population from the end of 2014 levels, the average office space per worker in the CBD area would increase to 107 square feet, which Nomura said is not excessive albeit above the average 103 square feet for the last decade. (1 square foot= 0.0929 square meters). Endi