Market confidence might have dented due to weaker economic growth and the escalation of the US-China trade war but landlords have been able to hold their rents steady due to tight vacancies and limited upcoming supply. In fact, Grade A CBD rent increased marginally by 0.4 per cent to S$10.65 psf/month in 3Q2019 after remaining flat in the preceding quarter, due partly to landlords of less premium spaces playing catch up with better quality buildings.
Singapore’s economic growth fell to 0.1 per cent year-on-year in 2Q2019. On a quarter-on-quarter basis, the economy contracted by 3.3 per cent, stoking fears of a technical recession if anaemic growth continues into the fourth quarter. Based on Ministry of Manpower’s figures, the net addition of workers in the financial and insurance, infocomm and business services remained healthy at 6,200 in the second quarter of this year, although lower than the 8,500 employed in the first quarter. Overall office demand has slowed, but emerging sectors within the technology space such as artificial intelligence (AI) and data analytics are increasingly starting to fuel the demand for office space. For instance, an AI start-up SenseTime, backed by Temasek, which took about 10,000 sf (square feet) in Frasers Tower, is planning to triple its Singapore staff to 300 in three years.
Demand for office space continued to be anchored by coworking and technology in the third quarter of 2019. In July, WeWork leased the entire 200,000 sf in 21 Collyer Quay, with plans to open in 2021 after current tenant HSBC vacates the building. Although there is currently some concern over the longer-term sustainability of the sector, companies cutting costs may actually find coworking spaces more attractive as they would not need to spend capital expenditure upfront to fit-out a traditional office. The flexibility to increase or decrease the number of members on a monthly basis is also a big draw to companies who are facing an uncertain outlook. New coworking operator One&Co by JR East Singapore just opened a 13,000 sf coworking centre in Twenty Anson to help connect the Japanese and Singapore companies. Demand from the financial sector held steady. For instance, American Express leased three floors at One Marina Boulevard and helped to back fill the space left behind by Microsoft, which had earlier made the move to Frasers Tower.
June Chua, Head of Leasing, Cushman & Wakefield said “Locating in a coworking centre is still a viable option for corporates especially for capex management, and office landlords are recognising that capex remains a challenge for tenants. Should the economy start to weaken, we may reasonably expect some landlords to start offering subsidies for fitting out work in order to secure tenants."
Christine Li, Head of Research, Singapore and Southeast at Cushman & Wakefield said, “Event risks such as US-China trade war and Brexit have increased uncertainties for corporate occupiers, who could put expansion plans on hold and wait for greater clarity in the near term. Should the global economy continue to run in low gear, office demand from corporates may slow down and spur more right-sizing amongst corporate occupiers going into 2020. Rents are still holding up at the current level at for many buildings due to the lack of CBD supply through 2021, but competition for potential tenants is likely to intensify, especially with more flexible office operators joining the fray. Occupiers could also expand their search to city fringe or even suburban locations with good infrastructural connections and local amenities. This would increase their range of leasing options."
Low Supply Pushes Prime Retail Rents Higher
Despite structural shifts in spending habits towards online and more experiences, Orchard prime rents bucked the trend and continued to rise in Q3 2019, driven by low supply of prime space and higher footfalls due to rising tourist arrivals. Orchard prime rents reached S$35.64 psf, rising 1.2 per cent quarter-on-quarter in the third quarter of 2019, based on a basket of prime retail malls tracked by Cushman & Wakefield Research. Other City Area rents also rose 0.3 per cent quarter-on-quarter to reach $21.69 psf while suburban rents remained flat at S$31.71 psf.
Although the macro challenges for brick-and-mortar retail scene remain, Singapore continues to be the destination for international brands to maintain a physical presence given its pre-eminent financial and business hub. Singapore Grand Prix, the annual Formula One night race held in September this year attracted a total of 268,000 fans, the second highest attendance since the inaugural race in 2008. This could possibly give the retail sales figure a boost in Q3 2019.
Athleisure retailers have been expanding steadily in Singapore. For example, Foot Locker, an athleisure footwear retailer took up more than 5,000 sf of space at the newly opened PLQ Mall, their fifth store since opening their first outlet in 2018. JD Sports also recently opened their third store at Funan, taking up 2,788 sf of space. The expansion of athleisure retailers is expected to continue as the athleisure wear market is poised to expand by nine per cent worldwide in 2019. This market is set to outperform the global clothing and footwear market beyond 2023, according to analytics firm GlobalData.
Moving forward, although the appreciable deterioration in the economy and the threat of a recession on the horizon have not resulted a collapse in retail demand to date, many retailers are grappling with high operating environment and declining revenue. Retail landlords should offer greater flexibility to prospective tenants in terms of effective rental rates and shorter-lease terms to minimise vacancy risks. The underlying demand for retail is still weak in view of the potential downsize risks in the near term. The pace of retail leasing could not be sustained if the expectations between landlords and retailers widen further. Interestingly, large department stores above ground floors in shopping centres are making way for flexible office operators who have the appetite to absorb much space to gain market share.
Download the Singapore Q3 2019 MarketBeat report