After nine consecutive quarters of growth, Singapore’s office rental index for the central region experienced a 1.7% decline in the first quarter of 2024. This drop follows a 27.5% increase over the previous nine quarters, indicating a shift in market dynamics as leasing demand becomes more tempered amid higher interest rates.

The Urban Redevelopment Authority (URA) reported that the islandwide vacancy rate for office space decreased to 9.6% at the end of Q1 2024, a slight improvement from 9.9% in Q4 2023. This drop occurred despite a net contraction of 96,900 square feet of occupied office space, highlighting a complex market environment where demand is stabilizing even as supply increases.

Wong Xian Yang, head of research for Singapore and Southeast Asia at Cushman & Wakefield, noted that landlords are beginning to adjust their rental expectations to enhance occupancy rates amid slower-than-anticipated leasing activity. He also pointed out that increased competition from both primary and secondary markets is expected to emerge in 2024.

While many property consultants report quarter-on-quarter rental increases in their Central Business District (CBD) Grade A office baskets, the average monthly rental value for Colliers’ CBD Grade A office basket rose by only 0.7% to S$11.57 per square foot in Q1 2024, reflecting a more cautious approach among landlords.

Catherine He, head of Singapore research at Colliers, explained that this modest rent increase was primarily driven by a demand for smaller office spaces under 10,000 square feet, where vacancy rates remain low. Alan Cheong, executive director at Savills Singapore, echoed this sentiment, stating that landlords are increasingly retaining tenants due to their limited budgets for relocation, even if rental increases are applied.

The report also noted that while certain landlords are reducing rents for lower-tier Grade A buildings, those with top-tier buildings continue to maintain or even raise rents for smaller spaces.

Andrew Tangye, head of office leasing advisory for Singapore at JLL, observed a healthy level of leasing inquiries in Q1 2024, predominantly from the consumer goods and professional services sectors. However, the focus remains on newer, higher-quality buildings, particularly as many occupiers are adopting a “flight to quality” trend.

Looking ahead, experts anticipate a potential increase in office demand in the latter half of 2024, driven by pent-up leasing interest from companies that postponed their plans due to external uncertainties. While ongoing rent increases are expected for the rest of the year, the overall growth is likely to be moderate due to the high interest rate environment and the significant amount of office space scheduled to be completed within the next two years.

As the office market continues to evolve, developments such as IOI Central Boulevard Towers and Keppel South Central are expected to add over 1.5 million square feet of new space to the market, increasing the options available for tenants seeking high-quality office environments.