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Office MarketBeat Report

Xian Yang Wong • 05/04/2022

Clouds Gather on the Economic Horizon

Singapore’s economic outlook remains stable with GDP growth forecasted at 3%-5% in 2022 amidst a re-opening of the global economy. However, the outlook is clouded by geopolitical developments and the trajectory of the pandemic. Firstly, the Ukraine conflict has further disrupted supply chains and stroked higher inflation due to higher energy and food prices. Additionally, a surge in Covid-19 cases in China has led to lockdowns across the country which would exacerbate supply chain disruptions. Prolonged supply chain disruptions and high inflation are potential downside risks that could weigh on the global economy and Singapore’s economic outlook.

A Broad-based Office Recovery on the Cards

Amidst tightening vacancy rates, CBD Grade A office rents climbed 2.1% qoq in Q1 2022, higher than 1.7% qoq in the preceding quarter. CBD Grade A vacancy rates tightened to 4.6% in Q1 2022 from 4.9% in Q4 2021. Decentralised office markets continue to recover, albeit at a gradual pace. City Fringe (all grades) and Suburban (all grades) office rents grew by 1.1% and 0.7% qoq respectively in Q1 2022 amidst stable economic conditions. City Fringe office vacancy rates tightened to 5.5% while suburban vacancy rates inched higher to 5.7%. We anticipate a continued recovery for the decentralised office market, given commercial decentralisation activities, spillover demand from the CBD, and limited new grade A decentralised office supply. Rochester Commons, the only new Grade A decentralised office development this year, has been mostly pre-committed by Sea Group. The next decentralised Grade A office development, Labrador Tower, will only be completed in 2024.

Office Rents to Trend Higher Despite Increasing Downside Risks

The Ukraine conflict is not expected to have a direct impact on the Singapore office market. Singapore has a limited presence in Ukraine and Russia and it does not import many essential supplies from the region. However, inflationary pressures would remain elevated, due to higher energy prices and supply chain disruptions. Also, lockdowns in China, a key trade partner with Singapore, have exacerbated supply chain disruptions. The confluence of these factors would raise firms operating costs and weigh on office expansion demand. However, the aforementioned economic uncertainties could slow the rise of interest rates as central banks keep interest rate hikes manageable to balance recession risks and high inflation. A slower increase in interest rates bodes well for economic growth and property demand. Additionally, the reopening of Singapore’s economy remains on track and more people will be returning to the office, boosting occupiers’ confidence to take up more office space. From 29th March, up to 75% of workers will be allowed to return to the office. In all, we are sanguine on the office outlook given a strong demand for top quality office spaces and a tight supply situation. As such, CBD Grade A office rents are still expected to trend higher at about 5% yoy in 2022.

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