A Grade Commercial A building as a landmark building with modern flexible layout and floor plates above 18,000 square feet (sq ft). The building size is above 300,000 sq ft and offers underground parking and good lift services zoned for passengers and goods delivery.

It offers high technical specifications (such as raised floors, 24-hour cooling system) and good quality building services (for example, security, CCTV), and is professionally managed. The building should also be located close to public transport.

Out of a CBD Core office stock of about 27.6 million sq ft, approximately 43 per cent of this stock is classified Grade A CBD Core. The rest of the office stock is classified Grade B CBD Core.

Highly sought after

Grade A buildings are highly sought-after especially by multinational institutional occupiers as they offer modern office features with large contiguous, often column-free space, with modern specifications as well as prestige.

Rents for such office buildings therefore are transacted at a premium over other buildings that do not necessarily meet all the Grade A features and specifications. The latter is generally classified Grade B.

This rental premium can be seen in the chart where the rental premium of the average Grade A CBD Core over Grade B CBD Core office rents is shown.

The chart shows that the rental premium is currently 24 per cent. This is the lowest for a 10-year period from Q1 2006 to Q2 2016 in light of current weak office demand and rental conditions.

Nonetheless, while the 10-year average rental premium is 36 per cent, it should be noted that this is propped up by the high rental premium achieved during the period from 2007 to 2009 when the average Grade A CBD Core rents rose at a faster pace than the average Grade B CBD Core rents.

Being more representative of recent market conditions, the five-year average rental premium is slightly lower at 30 per cent. This is also a reflection of a less volatile Grade A market in the recent cycles.

With the current rental premium 6 per cent lower than the five-year average, occupiers are enticed by the opportunity to locate their operations in Grade A buildings. “Flight to quality” has been driving leasing commitments to Grade A office developments.

Developers of upcoming Grade A office buildings especially have found it necessary to offer very competitive pre-lease terms in order to secure leasing commitments.

Faced with increased competition, existing landlords have also sought to retain occupation through the structuring of new renewal deals. They have found it necessary to adjust to market conditions with more competitive pricing and flexibility in leasing terms.