Singapore’s prime office market ‘heading nowhere’ as firms rein in spending, say experts

SINGAPORE: Businesses are remaining cautious about spending and investment plans and that, alongside the new normal of hybrid work, will continue to weigh on Singapore’s prime office market, according to industry experts at real estate consultancies.
Already, the leasing market for so-called Grade A offices in the Central Business District (CBD) has been fairly subdued this year.
“At best, we are seeing short-term lease renewals, like for one year,” Savills Singapore’s executive director for research and consultancy Alan Cheong told CNA.
Relocations and expansions from larger office tenants have been “few and far between”, echoed Mr Calvin Yeo, managing director of occupier strategy and solutions at Knight Frank Singapore in a report released on Monday (Sep 30).
Apart from international banks which have long been reducing their office footprints, technology firms that aggressively took up space in the CBD during the COVID-19 pandemic have also been following suit, he wrote.
And they will continue to cut down on office space amid an industry slowdown and global fears of a possible recession in the United States, Mr Yeo added.
Meta is one of those that have opted to downsize or consolidate staff in one location. The parent of Facebook and Instagram moved out of South Beach Tower, where it had a lease for seven floors until end-September, and put its employees at Marina One.
Tencent Holdings also “recently relocated” one of its offices from 30 Raffles Place to CapitaSky, a 29-storey tower in Tanjong Pagar, after its lease ended. The Chinese multinational told CNA that staff at its CapitaSpring tower office “may” also be relocated to CapitaSky.
Citi meanwhile will be giving up one of six floors it occupies at Asia Square Tower 1. In response to queries, a spokesperson cited the bank’s hybrid work model as the reason.
BNP Paribas is also reportedly mulling a smaller space at Ocean Financial Centre where it currently has a lease for six floors, until year-end. The French bank declined to comment when contacted.
Increasingly, firms are keeping a watchful eye on costs amid an uncertain global environment marked by slower economic growth and geopolitical risks, said Dr Chua Yang Liang, head of research and consultancy for JLL Southeast Asia.
“With the cost pressures, they have been looking at alternatives,” he said. “As a result, you do see some contraction in office spaces … by and large on the back of cost-saving strategies.”
The impact of artificial intelligence (AI) is another concern looming in the minds of businesses.
“If you are going to apply AI across several functions, the question has become ‘do you need the headcount?'” said Savills’ Mr Cheong.
“This is still being figured out, so many businesses are still waiting for a decision from their head offices. In the meantime, they don’t have the budget to move and fit out a new space.”
This uncertainty explains why in recent time, businesses with expiring leases have chosen to renew at their current location – but for a smaller space and a shorter time, according to Mr Cheong.
Doing so means paying higher rents per square foot as landlords are asking for a premium for shorter leases, he added.
Still, office tenants typically find this a better deal given the difficulty in finding a similarly priced Grade A office space in CBD, and the rising costs involved in refurbishing a new space.
“This is why short-term renewals have been the main activity we saw in 2023 and early 2024, and that is why rents went up marginally, not because of overwhelming new leases,” Mr Cheong said.
Meanwhile, hybrid work arrangements have continued after the pandemic, presenting another key factor for firms to reassess their office spaces.
Even though some have appeared to buck the trend – such as Amazon which has mandated its employees to return to office five days a week – experts still think hybrid work will remain the new normal.
“If more companies implement policies requiring employees to return to the office, the demand for office space could increase. However, this shift would take time as leases are typically signed for three to five years and existing space allocations are fixed,” said Ms Tricia Song, head of research for Southeast Asia at CBRE Singapore.
“In Singapore, where real estate costs are high, some companies might continue to favour hybrid work arrangements or adopt collaborative and flexible office designs to accommodate the rise in in-office employees.”
That said, the market is still seeing pockets of demand.
Knight Frank noted that Meta’s space at South Beach Tower has “broadly been backfilled by smaller occupiers”.
These smaller businesses have been among the most active in seeking out new office spaces, with “modest demand” coming from firms such as those from North Asia that are establishing new offices in Singapore, the consultancy added.
JLL also observed that a “significant portion” of Meta’s space has been re-let or is currently in advanced negotiations.
Demand is coming from existing occupants looking to expand within the same building, and others relocating from elsewhere in the CBD. These are firms from the professional services and tech industries, said Dr Chua.
Then there are companies that have moved back or are planning to move back into the CBD, as the rental gap between CBD and other districts has narrowed slightly.
Dr Chua said examples of firms doing so include those from the pharmaceutical, logistics and tech industries.
CBRE has also observed more relocation activity in the recent three months, “with businesses favouring prime city centre locations to attract and retain talent, prioritising quality over size”. 
This demand has been driven by legal firms, emerging tech companies and professional services, said Ms Song.
Statistics from at least two property consultancies actually show a rise in vacancy rates for the prime office market. JLL’s latest report found that vacancies for Grade A offices in the CBD rose for the second consecutive quarter to 8.3 per cent in the third quarter, the highest since the first quarter of 2022.
But this might be a short-term spike due to the introduction of rare new supply – the recent opening of IOI Central Boulevard Towers, located opposite Lau Pa Sat, which has about 1.2 million square feet of office space, analysts noted.
“Because of the supply situation that we are seeing right now, the market has seen a rise in vacancy. It’s very natural,” said Dr Chua.
“Subsequent to this, as very limited supply is coming into the market, you’ll find that it’s likely to tighten,” he added, noting that the vacancy rate for Grade A offices in the CBD could be around “7 to 8 per cent pending market conditions”.
In the coming years, supply of new offices will be limited, with only Keppel South Central in the Tanjong Pagar area coming up in 2025. The scarcity will be “further exacerbated” by delayed completion of Shaw Tower from 2025 to 2026, JLL said.
Office rents, which plateaued in the third quarter, are expected to “remain flattish” for the rest of the year, Dr Chua said.
Mr Cheong from Savills noted that 2025 would be “the year to watch”.
“At the moment, the market is heading nowhere. It will only be in 2025 that we will see more major leases coming up for renewal – that’s when we see how the market will unfold,” he said.
Next year is also likely when businesses will have a clearer idea on AI adoption, as well as the global economic outlook.
“Next year could be crunch time for companies in terms of headcount,” said Mr Cheong.
The United States Federal Reserve’s move to cut interest rates and leave the door open to more cuts might make it more feasible for companies to pursue expansion activities, such as bigger new offices.
But the effect of lower borrowing costs might not be immediate, CBRE’s Ms Song told CNA.
“It takes time for the benefits of lower interest rates to materialise, particularly when capital expenditure costs for fit-outs remain high.”