The strong surge in office rents has led to a widening gap between rents for office and industrial properties and increased demand for high-tech indus

The strong surge in office rents has led to a widening gap between rents for office and industrial properties and increased demand for high-tech industrial space.

A new study by property consultancy Jones Lang LaSalle (JLL) shows that the gap between average Central Business District (CBD) Core office rent and rents for high-tech space widened to 312 per cent in the first quarter of this year.

The difference was 250 per cent in Q4 2006 and just 144 per cent a year before that. The gap was at its narrowest, at 91.3 per cent, in Q4 2002.

‘As a result of office rents rising faster than high-tech rents, and with the gap expected to widen over the next two to three years, rent-sensitive tenants who satisfy industrial usage guidelines have been seriously considering business park/high-tech locations as a viable low-cost alternative,’ JLL Singapore’s head of industrial Tahlil Khan says in a recent paper.

Mr Khan cites as examples corporates such as financial institutions which require such space for their back-end data-processing centres, and data back-up and disaster recovery centres. These show strong interest in separating their back-room operations from frontline sales/marketing offices.

He expects the gap between office and high-tech rents to widen further this year as office rents continue to increase at a faster clip than high-tech rents.

In the first three months of this year, the average CBD Core office rental posted a 20.7 per cent quarter-on-quarter gain to $8.45 per square foot (psf) a month. Over the same period, the average office rent in decentralised locations rose 13.1 per cent to $4.75 psf, while the average rent for high-tech space inched up 2.5 per cent.

While the average CBD Core office rent in Q1 2007 is just 1.7 per cent shy of the previous peak in 1996, the latest Q1 gross monthly average rental for high-tech space of $2.05 psf was still nearly 34 per cent lower than the previous peak of $3.10 psf in 2001.

As at Q1 this year, the average monthly rental of CBD Core office space, at $8.45 psf, reflects a whopping 312 per cent premium to the average high-tech rental of $2.05 psf in the same period.

JLL’s definition of CBD Core offices covers all grades of office buildings in Raffles Place and Shenton Way.

For decentralised locations - which cover all grades of office buildings in the Tampines, Novena, HarbourFront and Alexandra Road areas - the average monthly rental of $4.75 psf in Q1 2007 reflected a 132 per cent premium to high-tech rents.

Because of the much lower rents, many tenants have been looking to relocate from offices to business parks and high-tech buildings. These buildings are a hybrid of office and factory space and occupiers must satisfy the Urban Redevelopment Authority’s guidelines of a minimum 60 per cent gross floor area used for industrial/business park purposes (such as research and development or product design/development and data processing), and a maximum 40 per cent for ancillary use (such as offices or showrooms).

As at the end of last year, the stock of high-tech space, including space in business parks, totalled 19.3 million square feet, or 5.4 per cent of the overall stock of industrial space in Singapore, according to JLL.

‘We expect high-tech and business park facilities to continue offering value-for-money solutions and anticipate that decentralised locations will continue to attract (possibly even more than ever) occupiers from the CBD, if not their backroom office operations.’

With no significant new office supply slated for completion until the year after next, JLL projects that a spillover of occupier demand from the office sector will translate into higher rents for high-tech/business park space.

‘We have seen evidence of this spillover with landlords increasing their asking rents, such as Eightrium @ Changi Business Park which recently increased its asking rents by 20 per cent to $3.50 psf a month. Another example is JTC’s The Signature at Changi Business Park, which has seen its posted rates as of Jan 1, 2007 rise by about 8 per cent.

‘In addition, there is anecdotal evidence that landlords of other buildings would be revising upwards their rentals soon,’ says Mr Khan.

But even if business park rents do go up, JLL still expects them to rise more slowly than rents for CBD offices, meaning that the gap will widen. So there will still be a strong incentive for qualifying occupants to relocate, or at least to split their operations into front and back ends, and move the back-end functions away from the CBD.

‘Also, as built-to-suit projects for high-tech buildings can typically be undertaken within a relatively short time frame (18 to 24 months), we expect more organisations to consider, with greater interest, decentralised locations as potentially viable options, especially with the widening rental gap,’ JLL said.

Source: The Business Times, 23 April 2007