What does the future look like for Singapore’s CBD Grade A office market?

Find out how a machine learning algorithm forecasts rents till 2028.

A Savills report says Singapore’s CBD Grade A office market is at a crossroads, faced with several possible paths which it can take over the next decade. 

“While economic challenges continue to increase and the tech sector, which just six months ago the market believed to be the driver of office space demand, faces more funding troubles, rents are still rising, albeit at a pedestrian pace,” it adds.

Here’s more from Savills:

However, these issues are contemporaneous to short term in nature. Beyond this, the green and greener movement plus other sustainability and wellness issues arise for both landlords and tenants. Juxtaposed with the above issues is also the adoption of hybrid working for many industries. All these are new confounding factors that the office market has to grapple with, likely rendering the market structure of the past 15 years almost irrelevant. 

So whilst demand for Grade A CBD office space may still be driven by the economic variables, namely GDP or its components, the elasticity of demand may change drastically, leaving forecasts from models built on data from the past 15 to 20 years questionable. This means that the accuracy of even machine learning based models is suspect. But is that so? 

We believe that in a situation where the market is expected to undergo upheavals, using a baseline may still offer a glimpse of the future. Using a machine learning time series forecasting function, rents are forecast to continue trending up until end-2028. 

Using a machine learning algorithm, the graph below shows how Savills Grade A CBD rents may perform from Q2/2023 to Q4/2028. The trend is positive and in the medium term (until end-2024), based on previous rental behaviour, it should be riding the up-phase of the cycle. The rental forecast was built mostly on data from the last decade where low interest rates and a rapidly expanding tech industry subsisted. Before the SARsCoV-2 lockdown, the practice of hybrid working was not prevalent. 

Moving forward, we see that the “world” is now being impacted by many more factors. How the office market may pan out for the rest of this decade in this paradigm where there are superpower tensions, a medium-term affliction of high inflation and interest rates, hybrid working, sustainability and wellness scoring and lastly, the most important factor, the rapid adoption of Artificial General Intelligence (AGI) is not only not easily modelled but impossible to do so. 

However, we do believe that for 2023, rental growth will be subdued, and driven by cost push factors. Thus, the sharp upswing in rents that a naïve model churns out for this year is unlikely to materialise. The main reasons for this year’s performance are economic and banking related and the restructuring of the tech industry. 

As a base case, beyond the immediate issues, hybrid working, tenant’s cost to fit out a sustainable office space and AGI are likely to ease demand pressures. However, we are not discounting the possibility that if these new practices and adoption of technology spawn new industries, demand for office space may revive strongly. 

The upshot from this is that we cannot make a forecast based on the past because of the myriad of macro interventions. We have to start from scratch. Nevertheless, office rents here can still find support only if the supply of Grade A space in the CBD is constrained. 

For 2023, we are maintaining our 2% YoY growth for Grade A CBD office rents with vacancy levels hovering at around 7% to less than 8%.