After rising steadily for nearly four years, average Grade A and prime office rental values in Singapore are estimated to have dropped about 20 per cent in the fourth quarter (Q4) of this year over the preceding quarter, as revealed by the latest figures from CB Richard Ellis (CBRE).

Grade A covers the best office space within CBRE’s prime office space basket. With the decline in Q4 2008, the estimated fall in rentals for the whole year is around 13 per cent for Grade A space and 14 per cent for prime space.

CBRE executive director Moray Armstrong said while the early part of 2008 saw modest rental growth, the market had peaked by Q3 2008. Armstrong added that it was only in Q4 2008 that the sheer depth of the financial crisis threw the office market into a decline. He also said further downward pressure on rents is expected throughout 2009.

According to CBRE, the average monthly Grade A office rental value at the end of this year is estimated to drop to about S$15 psf, a fall from S$18.80 psf in Q3 2008. The average prime office rental value in Q4 2008 is estimated to have dropped to S$12.90 psf from S$16.10 psf in Q3 2008.

Last year, office rents nearly doubled, rising 96 and 92 per cent for Grade A category and prime space respectively. That figure was on top of respective gains of 53 and 50 per cent recorded in 2006.

According to Armstrong, the pace of rental growth experienced through the past three years was “clearly unsustainable and would have been arrested by the increased volume of new supply in the pipeline”. He adds that CBRE had already anticipated a “supply-led softening in the market” from 2010 onwards.

The slowdown in the economy and loss of business confidence has resulted in office demand drying up. For existing landlords, tenant retention is top priority. The scenario next year could very likely be a market where lease renewals outnumber relocations.

Grade A office rents will likely weaken a further 10 to 15 per cent in the first half of 2009, said Donald Han, managing director of Cushman & Wakefield Singapore. According to Han, landlords are keener to provide existing tenants with an incentive to retain them.

The dip in office rentals reflects a reversal of the market dynamics to a more demand-led rather than a supply-led model. Han noted that office rents surged due to a shortage of existing office stock, but now rents are falling due to weakening demand.

Grade A vacancy rates had been sub-one per cent for almost two years before rising to 1.2 per cent in Q3. While some analysts estimate a further rise to over 2 per cent by year-end, CBRE does not expect to see any significant changes in vacancy levels until sizeable new office developments see completion from 2010.

CBRE’s Armstrong expects “fairly robust negotiations” as many tenants with renewals and rent reviews next year under leases committed three to four years ago would still be faced with rents potentially rising by 75 to 150 per cent.

Take-ups in new developments are expected to be sluggish until demand improves and tenants are able to secure capital expenditure approvals to relocate, said Armstrong.