Singapore ranks 6th most expensive city for office space

Savills Prime Office Costs (SPOC) analysis has revealed that Singapore ranks as sixth most expensive city for office space, with total office costs at USD$142.73 (SGD193.42) per square foot per annum in Q4 2022, indicating a 1% increase from the previous quarter. (Please refer to Table 1)

In Singapore, landlords pay for taxes and service charges, which are included in the gross rent paid by tenants. The cost of fit-out at SGD180 per square foot, is ammortised over the period of the lease and this adds to the overall all-in cost to occupier of USD$142.73 (SGD193.42) per square foot per annum.

The figures in the SPOC Index were calculated through annual gross rent (face rent + taxes + service charges), amortised capital expenditure (landlord’s contribution to the fit-out costs), and amortised incentives (any rent-free period).

The SPOC analysis found London (West End) to be the most expensive city for office occupancy, followed by Hong Kong, New York, Tokyo, and London (City). Singapore surpassed Beijing, Shanghai, Delhi, San Francisco and Dubai to secure the sixth spot.

Globally, landlord incentives to occupiers have declined 1% over the last year, despite the worsening macro-economic backdrop, as occupiers compete for the limited best quality ‘green’ office space available in each market.

Regional and city-level variation in the decline of incentives
Savills Research reports a significant regional and city-level variation in the decline of incentives. Europe, Middle East and Africa (EMEA) has seen the strongest drop in incentives with an annual fall of 5%, largely being driven by decreases in major gateway cities such as Paris, London, and Dublin.

In contrast, Asia Pacific has seen minimal declines in incentives, with the regional average change hovering at -0.5% for the year, while North America has seen an average increase of 2%, driven by San Francisco, which is working to retain and attract occupiers in the face of large-scale shifts within the tech industry.

Savills Research forecasts that prime offices across the globe are likely to see flat to slightly positive rental growth during 2023, with Asia Pacific seeing 1% growth, EMEA 2%, and North America 0%.

As the rush for ESG compliance continues, multinational companies who can afford are considering only 'green-rated' buildings, which will likely drive-up pricing for high-quality, certified assets.

Alan Cheong, Executive Head of Research and Consultancy foresees, “With the need for tenants to move to premium offices to comply with ESG mandates, inflation working its way through the service charge component, and the constant flow of family offices setting up here, we may potentially see our basket of offices eke out a 2% YoY increase in 2023.”

Over the past year, Savills Research reports that rent increases for prime offices averaged 3% globally, as rising costs were relatively confounded by declining incentives and landlord contributions towards fit-outs. Net effective costs to occupiers – the cost inclusive of rent, fit-out, and any incentives – were up only 4% year-on-year, considerably lower than inflation and increasing energy and labour costs. However, it should be noted that despite the increase in gross rents, the market continues to be cautious.

Matthew Fitzgerald, Director of Savills EMEA Tenant Advisory Team, said: “Despite the uncertainty in the macro-economic environment, the fundamental supply/demand imbalance of prime office space in many key cities has held rents. Incentives have largely fallen, and rents are actually forecast to increase over the next 12 months, but the inflationary impact on fit-out and service charge costs is now affecting occupiers. The situation varies across cities, of course, depending on the industry types associated with that city, but an almost-universal rush for ESG compliance with multinational companies considering only ‘green rated’ buildings will likely to continue to push up pricing for the high-quality, certified assets.”

Nevertheless, economic challenges and workplace changes remain daunting for the office market. How all these clashes head on with the flight to a limited pool of green buildings will be interesting.

Marcus Loo, CEO of Savills Singapore adds, “The office market rental trend is undergoing a transition now. With macro-economic uncertainties and inflation working its way through the service charge component, the logical deduction is for net rents to turn softer. However, the tight supply of good quality ‘green’ buildings has somewhat buffeted this impact. We remain cautious as the job market continues to experience layoffs and occupiers ‘right-sizing’ against the tide of economic concerns and rising fit-out cost and service charges.”

Note: Quarterly change is based on a standardised format of USD per sq ft of usable space per annum to account for variations in currency