SINGAPORE (Sept 5): Knight Frank Singapore says it sees the emergence of a two-tier office market in Singapore, given how the city state has seen a growing rental divergence between its top-grade and older office buildings as of late.

In Knight Frank’s 2Q17 Research Bulletin for the office sector, Calvin Yeo, executive director & head, office advisory, notes that Grade A+ office rents in the Raffles Place/Marina Bay precinct rose for the first time in nine quarters over 2Q by 0.2% q-o-q to an average of $9.34 psf pm, on the back of a sustained “flight-to-quality” movement.

Occupancy in these existing Grade A+ buildings rose by 0.3 percentage points from 97% in 1Q to represent the highest rate of occupancy growth registered in the last six quarters.

In his view, leasing interest has particularly spiked for new office developments within the central business district (CBD), which has seen stronger leasing momentum over the past two quarters with more tenants such as Microsoft and Ocean Network Express swooping in to secure prime office spaces in the area.

By contrast, older office buildings have yet to witness a rental recovery, which Yeo attributes to oversupply caused by looming vacancies in older buildings exerted an overall check on rents over the quarter.

This has led the average rent of older Grade A office buildings in the Marina Bay/Raffles Place precinct to fall 0.2% on-quarter to $8.25 psf pm, making 2Q17 its 9th straight quarter of decline.

Due to the mixed bag of office rental performances over the quarter, overall rents in the CBD area remain unchanged at an average of $8.31 psf pm.

“The ‘flight-to-quality’ phenomenon with first-wave tenant moving into the newly-built Marina One East Tower and UIC Building is starting to impact older Grade A office spaces, with some landlords of these buildings under pressure to backfill their vacated spaces,” says Yeo, who also believes this trend will continue to release opportunities over the next two years in choice buildings that were traditionally fully-leased.

Meanwhile, Yeo says the threat of secondary spaces – currently-occupied spaces available for lease from existing tenants – has also added pressure on both landlords and existing tenants in general to hunt for new occupiers.

With more viable choices to upgrade their offices to value-for-money secondary spaces at prime locations in the CBD, he believes relocation activity from both small and medium-sized tenants is set to gather momentum in the second half of the year.

He also foresees the possibility of merger and acquisition (M&A) activities arising in 2H17 from stiff competition in the co-working space segment, with 64 co-working centres operating as at 2Q and another four slated to open by 1H18.  

“Despite a pick-up in leasing activity in 1H17 compared to 2016, the net take-up of office space is projected to be only moderately higher from 2016, with leasing demand likely to originate from technology firms, consultancy groups, co-working centres and other diverse types of service trades,” states Yeo.  

“Envisaging an improvement in space take-up on the back of firmer economic growth and coupled with limited new supply in the Raffles Place/Marina Bay precinct in the next three years, prime office rents in this core CBD precinct will likely recover by 1% to 2% y-o-y by end-2017. Rents in other precincts are poised to stabilise in the second half of 2017 maintaining a flat to marginal upside of 1% to 2% y-o-y by end-2017,” he concludes.