Singapore office rents in the Central Region saw a 5.1% quarter-on-quarter (q-o-q) increase in the first quarter of 2023, staying on the same positive growth trend observed in the previous quarter, according to data released by the Urban Redevelopment Authority (URA) on April 28.

The continued uptick in rental prices is underpinned by the healthy office leasing market in 2022, which saw leases tend to be signed or renewed ahead of actual commencements.

Additionally, office rents may have received a boost from a higher volume of smaller deals negotiated at higher per-square-feet (psf) rates. According to JLL’s Tay Huey Ying, head of research and consultancy in Singapore, most of the leasing activity in 1Q2023 was largely led by small and medium-sized space occupiers with urgent needs for new workplace design or increased headcounts.

This increased demand for office spaces pushed rentals up for both Central Area and fringe areas, with the former registering a 3.9% q-o-q increase and the latter seeing an 8.8% q-o-q jump.

However, Tricia Song, head of research for Southeast Asia at CBRE, observed that rental growth for prime buildings – a proxy for Category 1 office space – slowed in the same period. According to URA data, median rentals by contract date for Category 1 office space grew by a mere 0.2% q-o-q to $10.77 psf per month in 1Q2023, moderating significantly from the 0.8% q-o-q increase seen in 4Q2022. Vacancy rates for Category 1 buildings have also seen a rise from 9.5% to 10.9%.

This weaker performance could be attributed to lowered sentiment arising from recent tech layoffs, resulting in a more muted market sentiment in the office sector and an increase in shadow space.

On the other hand, the fringe area experienced a decrease in vacancies with the rate dropping to 7.8% from 8.4% in 4Q2022. Vacancies were also seen to have decreased from 16.6% to 15.8% in the Outside Central Region. The tighter vacancies appear to be partly responsible for the higher office rents in the fringe area.

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In terms of islandwide performance, net demand for office spaces in 1Q2023 came in at 226,000 sq ft and vacancy rates slid slightly 0.1 percentage points to 11.2%, matching the lowest point of 12.9% registered in 3Q2021.

Following the robust office rental growth bolstered by strong demand, Cushman & Wakefield’s Wong Xian Yang believes office rental growth will soon be tempered due to unfavourable business sentiments and financing conditions. Despite the dip, Wong thinks a sharp corrected in office rents is unlikely as overall supply still appears to be tight.

Tay at JLL adds that demand for new office towers remains persistent, with guidance given from non-bank financial and professional services as well as Chinese companies. Furthermore, she also believes demand for investment grade strata-titled offices is likely to surge as foreign acquisition of residential properties will be restricted with the new cooling measures implemented.

In terms of outlook, Tay expects office rental growth to remain modest in the rest of 2023, while leasing activity for recently completed projects will be sustained, albeit the subdued market sentiment.