660,000 Square feet of shadow space in Downtowncore Grade A CBD Market in Q1/2023

For Immediate Release – Savills Research Singapore Offices H1/2023 report indicates that shadow space* in the Downtown Core Grade A Central Business District (CBD) market is estimated to be 2.1% (660,000 square feet) of the Savills basket of Grade A space in the Downtown Core (31.4 million square feet) in Q1/2023.

For the Downtown Core, in Q1/2023, the URA vacancy rate rose 0.1 percentage points to 12.1%. For Savills Grade A space in the Downtown Core, it increased 2.2 percentage points to 8.5%.

By establishing an underlying relationship between URA’s office stock (both Category 1 and Category 2) and Savills basket of Grade A buildings in the Downtown Core was maintained, the net percentage point change of 2.1% (calculated as the 2.2% increase in vacancy from Savills minus the 0.1% increase from URA’s figures), could be a proxy for shadow space. Graph 1 shows the different vacancy rates for Q1/2023 and the gap proxying shadow space.

Although the quantity of shadow space may appear substantial when compared to the average net take-up of 747,000 square feet of CBD Grade A space from 2013 to 2022, it remains manageable when distributed among the multitude of Grade A office buildings in the Downtown Core.

Marcus Loo, CEO of Savills Singapore comments, “The spectre of shadow space is surfacing to haunt the market, coupled with multinational corporations right sizing and returning some of their previously occupied space to the landlord upon renewal. Landlords, in general, are blessed by the fact that overall vacancies are low, and we are in a tight supply market situation.”

Alan Cheong, Executive Director of Research & Consultancy shares, “Although 2023 is a year where shadow space is emerging rapidly, rents may still hold as the supply is bunched up towards the end of the year and possibly spilling over to next.”

For landlords, the ball is still in their court because the shadow space still has a paying tenant and are therefore under no pressure to reduce rents for the vacant space in the building. Graph 2 provides evidence of this trend, as Category 1 office rents increased across the board despite the rise in vacancy rates in the Savills basket of CBD Grade A office space.

Looking ahead, the market may face turbulence when leases from some big tech companies expire. However, there is a probability that the market could react mildly in 2023 as landlords remain confident in their finances.

Additionally, landlords may have the ability to attract tenants from non-Green buildings. Demand for environmentally friendly buildings is expected to increase, particularly for Grade A buildings in the Central Business District (CBD), all of which carry at least the Gold Plus BCA Green Mark certification.

In addition to the exodus to Green Mark buildings, and notwithstanding mounting economic challenges, the market is also seeing mild space expansion demand from several industries. Chinese investment firms have also been looking to set up in Singapore albeit the space they are looking for is individually small (2,000 to 3,000 sq ft) and serviced offices are seeking profit sharing management deals. Start-ups, facing fund-raising challenges, are transitioning back to serviced offices or co-working spaces and the rapidly growing Artificial Intelligence sector is expected to drive future demand for office and business park space.

Despite the economic challenges, the expected peak and reversal of interest rates may reduce the pressure on landlords to lease space at any cost. Savills maintains a projected 2% year-on-year growth for Grade A CBD office rents, concentrated in the first half of the year. Vacancy levels in 2023 are projected to hover between 7% and less than 8%.

Marcus Loo further emphasises, “We believe that in 2023, there will be a tussle on rent expectations between landlords and tenants, given the ongoing global and local economic headwinds.”

*Shadow space refers to any vacant office space within leased buildings held by tenants who are not fully utilising them, and that is actively listed or marketed for lease. It serves as an indicator of additional available space beyond the official vacancy rate.