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Covid-19: Prime office rents expected to fall by at least 10 per cent in 2020, say analysts

SINGAPORE — The economic fallout of the Covid-19 pandemic is affecting not just tourism and other customer-facing sectors. Office rents are also taking a hit with property analysts projecting that rents for prime space will drop by at least 10 per cent in 2020.

Covid-19: Prime office rents expected to fall by at least 10 per cent in 2020, say analysts

Property consultancies say the move to remote working is one factor putting downward pressure on office rents.

  • Office rents have already fallen up to 4 per cent since the Covid-19 outbreak
  • Remote working and weak business sentiment are putting downward pressure on rents
  • Office vacancy levels so far remain low due to Govt support measures for firms 

 

SINGAPORE — The economic fallout of the Covid-19 pandemic is affecting not just tourism and other customer-facing sectors. Office rents are also taking a hit with property analysts projecting that rents for prime space will drop by at least 10 per cent in 2020.

A combination of weak business sentiment and the adoption of remote working as the default arrangement for many workers has led companies to cease their expansion plans, with most just opting to renew their leases, said analysts.

While official data from the Urban Redevelopment Authority for the second quarter is not out yet, analysts told TODAY on Thursday (July 23) that rental reductions have already started.

Grade A office rent in the Central Business District (CBD) has declined by between 2.3 and 4.1 per cent compared with the first quarter, according to three property consultancies.

However, vacancy rates remain quite tight at about 5 per cent, said property firm CBRE’s head of research for Southeast Asia Desmond Sim.

A report by real estate firm Knight Frank confirmed that vacancies for office rentals in the second quarter had dropped only 0.2 per cent from the previous quarter owing to ongoing lease commitments.

Mr Sim said that the drop in office rents so far has not been drastic due to support measures from the Government.

However, he said that many companies are downsizing their real estate requirements due to the weak business sentiment expected over the next 12 months.

Mr Mark Lampard, executive director of property consultancy Cushman and Wakefield, said that office space is part of a dynamic supply chain.

“The rent tenants pay is linked to building values, which is linked to debt and lending. When parts of the chain become disrupted or unstable, other links are impacted,” he said.

Knight Frank’s head of corporate real estate, Mr Calvin Yeo, said that landlords should lower rent expectations and offer more flexible lease terms to retain or attract tenants.

This is because tenants will be seeking shorter lease terms, as well as the flexibility to adjust the size of their offices as they try to match uncertain business plans to their real estate footprint, noted Mr Lampard. 

A CBRE report estimates that Grade A office rents will fall 13 per cent this year, while Cushman and Wakefield projected the slide would be 10 per cent. Knight Frank put the full-year fall at between 10 and 15 per cent.

Beyond the short- to medium-term concerns, analysts also pointed to possible long-term structural shifts in the market that would lower demand for office space if banks and technology firms opt to save real estate costs and continue with remote working arrangements even in the post Covid-19 world.

Mr Lampard said office rent was already on its way to trending downwards in 2020 due to scheduled supply in the pipeline.

People working from home as a result of the pandemic has had a “turbo effect” on the rate that office rents were set to reduce, he added.

However, Mr Sim said it is still early days to assess the impact of remote working on office demand.

While there may be a certain percentage of staff working remotely, he said that companies still need a proper office location at the end of the day.

With social distancing becoming the norm now, companies may retain their office space and spread their staff out even though a certain proportion are working from home, he said. 

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