Analysts have said Grade B and C offices need to offer more attractive features like new facilities, or risk falling occupancy levels.

Already, there is a growing trend of tenants from the banking sector relocating to Grade A office space or planning to do so.

Banks are leading a flight to Grade A office space as the sector rebounds strongly from the financial crisis and prepares for further expansion.

Analysts said this trend stems from capitalising on low rentals of about S$7 to S$8 per square foot for Grade A offices. These levels are 60 per cent lower than the peaks two years ago.

Donald Han, managing director, Cushman & Wakefield, said: “The Grade A office buildings are doing very well right now in terms of the flight to quality phenomenon that’s happening because rents are at an all-time low, so obviously they are moving into Grade A office stock.

“And on top of that, the bulk of supply that we have in the next three years, about 7 million square feet from here on, are all Grade A office stock – about 80 per cent of them.”

About 2.5 million square feet of Grade A office space will be coming up annually over the next 3 years. And analysts said landlords of lower grade offices will have to revamp their properties to stay relevant.

Some measures could include upgrading older properties by sprucing up the facade of the buildings.

Tay Huey Ying, director of Research and Advisory, Colliers International, said “They can also look at redevelopment by amalgamating with their neighbouring plots so they can enjoy bigger floor plates and cater to financial institutions, for example.”

Occupancy rates are currently at about 96 per cent for Grade A offices, and 90 to 92 per cent for Grade B offices.

Analysts believe the financial sector will continue to lead in the occupancy of Grade A office space. But Grade B should not do too badly, as tenants from other sectors, such as shipping and insurance, are renewing or expanding their operations.

Analysts said the overall office market is expected to perform well, with rentals increasing as much as 12 per cent by the end of this year due to the strong economic outlook.

Source : Channel NewsAsia – 6 Aug 2010