Published December 13, 2010
High-specs industrial, office rental gap grows
But consultants say the difference not big enough for firms to move out of the CBD
By EMILYN YAP
(SINGAPORE) The rental gap between office and high-specs industrial space has widened, with the commercial property sector picking up at a faster pace last year
But consultants say that the difference has not become large enough to drive companies out of the central business district - and the flight to the suburbs seen in 2007 and 2008 may not be repeated just yet.
According to Colliers International, the projected average monthly gross rent of CBD Grade A office space in the fourth quarter (Q4) is $8.09 per square foot (psf). This is $4.94 more than the projected rent of $3.15 psf for high-specs industrial space.
Next year, the rental spread could widen to as much as $6.60 - the largest since Q4 2008, when the financial crisis unfolded.
Colliers defines high-specs space as industrial premises with some office features and higher than normal specifications, such as business parks.
Firms saw the benefits of moving to such space in 2007 and early 2008 when the economy flourished and office rents surged. The cost savings were considerable - the rental gap between offices and high-specs industrial space was as high as $10.07 in Q1 2008.
A considerable number of companies, especially financial institutions, shifted their operations from offices downtown to business parks and other high-specs space. Standard Chartered Bank, Citi and DBS were some which moved their back-office functions to Changi Business Park.
It was not until the economic downturn hit that the rental gap shrank. It fell to $3.09 in Q3 last year - the narrowest since Q4 2005.
As the recession ended, both the office and industrial property sectors started to recover but the former has been 'charging ahead faster', causing the rental gap to widen again, said Colliers research and advisory director, Tay Huey Ying.
Nevertheless, CB Richard Ellis (CBRE) Research believes the difference in rents is 'not significant enough at the moment' for firms to move out of town again.
Jones Lang LaSalle (JLL) head of South-east Asia research, Chua Yang Liang, also pointed out that suitable office space was in short supply during the boom years. 'Given the conditions today, there are fewer push factors to drive firms to relocate immediately,' he said.
Dr Chua expects the rental gap to widen further next year, but only marginally. New office space from the upcoming OUE Bayfront, Ocean Financial Centre and Asia Square will meet rising demand, which should keep the growth of CBD prime Grade A office rents in check and the rental gap, therefore, 'fairly stable'.
Colliers agreed that companies which rely on being centrally located are likely to stay in town. But others, according to Ms Tay, 'are increasingly viewing high-specs industrial space as an attractive alternative, not just from the rental-savings perspective, but also due to the narrowing gap in the offerings of (such space) and traditional office developments, particularly the older ones'.
The high-specs industrial sector has had a tough climb out of the economic slowdown. According to Colliers, the average monthly gross rent for such space fell from $4.05 psf in Q4 2008 to $3.08 psf a year later, and then to $3 in Q1 this year.
The rent has been inching up since. If Colliers's forecasts materialise, it could reach $3.15 psf in Q4 - 5 per cent higher than at the start of the year - and climb another 5 to 10 per cent next year.
The recovery has been stronger for conventional industrial space. The average monthly gross rent for upper level prime factories is projected to be $1.70 psf in Q4, up 5 per cent from Q1, while that for upper level prime warehouses could reach $1.64 psf, rising 8 per cent.
Capital values of conventional industrial space have surged on the back of strong investor interest. Upper level prime freehold factories could be worth $460 psf in Q4, reflecting a 20 per cent hike since Q1.
Views are mixed when it comes to how well this sector might do next year. 'Business sentiment for H1 2011 is cautious because of uncertain demand from overseas. We expect rents to hold steady for the first six months,' said CBRE Research.
But JLL's Dr Chua believes that the outlook for conventional industrial space is 'promising' and he expects monthly rents for conventional industrial space to rise 8 per cent by the end of next year.
Source: www.businesstimes.com.sg
