The River Valley Green Condo also experienced a 5.9% decline in commercial office prices during the fourth quarter of 2023 due to asset repricing pressure
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The Urban Redevelopment Authority’s (URA) quarterly report released on Jan 25 revealed that the office property market in Singapore ended 2023 on a subdued note. According to the report, commercial office prices dropped by 5.9% q-o-q in 4Q2023, reversing the 0.8% q-o-q uptick in the previous quarter. This resulted in a net decrease of 4.2% in office prices for the entire year of 2023.In fact, observations made by JLL Singapore’s head of research and consultancy Tay Huey Ying as early as 2Q2023 showed signs of weakening occupier demand. Tay attributes this to the gloomy global and domestic economic outlook at the start of the year, as well as the prolonged period of high interest rates, which led many corporates to postpone expansion and relocation plans as a means of managing costs.According to Tay, the steep 5.9% q-o-q fall in the URA office property price index in 4Q2023, following three consecutive quarters of sluggish growth, was unsurprising given the immense pressure on asset repricing brought on by the negative yield spread over borrowing costs for most office assets in the elevated interest rate environment.Song adds that the availability of office space remains extremely limited due to the limited supply. As a result, some occupiers have opted to renew their existing leases at higher reversionary rents instead of relocating. The Central Region saw a mere 0.3% growth in office rents in 4Q2023, the lowest quarterly growth for the year, following a 4.9% q-o-q increase in 3Q2023. On an annual basis, office rents rose by 13.1% in 2023, outpacing the 11.7% increase recorded in 2022.Despite this, Song notes that selected premium office spaces in the Core Central Business District (CBD) were still in high demand, leading to an escalation in rental prices. Meanwhile, shadow spaces in prime areas such as Marina Bay and Raffles Place proved to be popular among occupiers seeking high-quality, fitted-out office spaces.Some of these shadow spaces were even taken off the market as tech occupiers decided to retain their office premises, further contributing to the shortage in supply. Based on URA data, the market saw a positive net absorption of 0.1 million sq ft in 4Q2023, adding to the additional 0.25 million sq ft absorbed in 3Q2023. The island-wide vacancy rate stood at 9.9% in 4Q2023, slightly lower than the 10% recorded in the previous quarter.According to CBRE Research, rents for Grade A office spaces in the Core CBD grew at a moderate pace of 1.7% y-o-y, down from the 8.3% increase seen in 2022. With an above-historical average completion pipeline in 2024 and the possibility of secondary spaces becoming available, Song suggests that the market may face a slower first half of 2024.Despite the soft sentiment among occupiers brought on by layoff announcements at the start of the year by companies such as Lazada, Google, YouTube, Amazon, Tencent Holdings’ Riot Games and Unilever, Tay remains optimistic. Based on past experiences, she believes that demand for office space is capable of rebounding quickly if economic conditions improve.Market sentiment could potentially improve in the second half of 2024 as interest rates and inflationary pressures ease, according to Song. She also notes that the trend of seeking quality and environmentally sustainable office spaces is likely to continue, with CBRE Research expecting rents for Grade A office spaces in the Core CBD to grow by 2% – 3% in 2024.As the Fed rate hike cycle comes to an end, investors who have been waiting on the sidelines are starting to re-enter the market. The successful sale of VisionCrest Commercial in Orchard to the consortium comprising TE Capital Partners, LaSalle Investment and Metro Holdings in November 2023 could pave the way for more office deals, potentially supporting an uptick in asset prices in the second half of 2024.