The market bottomed out in 2021 and rates advanced during the course of 2022, in line with expectations, due to a tightening of supply. When tenants have fewer options to pick from, rentals will invariably increase, in part due to scarcity value. The tech companies, who are still the main drivers of the market, are becoming more cautious, due mainly to tightening monetary situation. Whilst some e-commerce companies are giving up space, sacrificing expansion to prioritize on substantial profits, some of the other tech companies such as Twitter, Facebook and Amazon are soon expected to follow suit.
Still, the limited supply situation will prevail for the next 2-3 years, which in turn will help support rental growth. This though will be at a more modest rate. Some of the older buildings will struggle to find new tenants because occupiers are becoming more discerning about their office premises in order to recruit staff. Whilst others just focus on the bottom line profit.
Most market watchers expect office rents to advance next year but below initial projections of 6% to 8%. We are now more likely to see growth of around 4% to 6% in 2023. Asking rates for the top premium grade A buildings have risen to around $14.00 to $15.00 per sq ft. How much room there is to negotiate on these rates depends upon the size of the unit involved. The mid-tier market between $8.00 per sq ft and $10.00 per sq ft will remain the most active.
Not only are base rents expected to firm but it is widely anticipated that service charges will be increased, but these have not fully kicked in yet. Most affected will be tenants in those buildings which haven’t seen an adjustment in service charge for a long time. Tenants should also factor in an impending increase in GST (Goods and Service Tax). This will increase from 7% to 9% phased in over a two year period. The first phase will be an increase to 8%, effective from 1st January 2023 and the next phase to 9%, effective from 1st January 2024.