Warehouses shine on strong logistics demand; high rents to face resistance in 2024

LANDLORDS holding modern warehouse assets had another standout year in 2023. But deteriorating business sentiment will weigh on high rents, and business parks could suffer from a flood of new supply.

Tricia Song, CBRE’s head of research for Singapore and South-east Asia, said: “Business sentiment in the industrial sector is relatively muted, as priorities shifted to managing costs amid high interest rates, concerns over geopolitical risks and China’s economic issues.”

Occupiers were not as quick to expand and take up more space in the second half of 2023. Still, “the industrial sector remains fundamentally strong and occupiers were keen to secure high-quality spaces, thus opting to renew their leases or relocate if an attractive opportunity arose”, she added.

Singapore’s manufacturing sector has been weighed down by weaker external demand from major economies, and its 2023 full-year non-oil domestic exports (NODX) is expected to shrink by 12 to 12.5 per cent year on year (yoy).

But a “modest recovery” is expected in 2024, with NODX projected to grow by between 2 and 4 per cent, said Enterprise Singapore in its quarterly review of trade performance on Nov 22. 

JTC’s price and rental indices of all industrial space for the third quarter of 2023 rose by 1.4 per cent and 2 per cent, respectively, compared with the previous quarter; and by 6.2 per cent and 9.3 per cent compared with the previous year.  

Bright spots

While economic headwinds have induced caution, “the warehouse segment is expected to be the bright spot for 2024, with strong demand from last-mile logistics and cold storage”, noted Lynus Pook, Colliers Singapore’s executive director and head of industrial services. 

A limited supply of logistics buildings and warehouses in good locations also helped these segments to do well this year, supported by the need to stock up in case of supply-chain disruptions and the continued rising demand from e-commerce, said Alan Cheong, Savills Singapore’s executive director for research and consultancy.

Brenda Ong, executive director at Cushman & Wakefield (C&W), said that rents for the warehouse segment are expected to grow 6 per cent yoy in 2023 and up to 5 per cent in 2024, compared with the 2.3 per cent growth in 2022.

Even though supply remains tight in 2024, C&W added, warehouse rental growth would taper off next year, as “tenants are increasingly resistant about rents, which have nearly doubled since the pandemic”.

CBRE’s Song noted that the prime logistics segment has seen the highest rental growth across all industrial segments this year.  

Rents are up 11.7 per cent in the year to date and have chalked up positive growth for 14 consecutive quarters, culminating in a 38.2 per cent increase from the trough in the first quarter of 2020. Rents are expected to rise by 14 per cent for the full year, exceeding the 10.2 per cent growth in 2022.

The performance has been driven by strong leasing demand along with limited supply, with occupancy rates close to full for the fifth consecutive quarter, added Song.

The pharmaceutical industry, e-commerce and importers of goods classified as “dangerous” (such as flammable or compressed gases and lithium batteries) continued to boost demand for logistics space in 2023, said Savills. 

C&W’s Ong predicted that rentals for prime logistics would show a 5 per cent rise in 2024. 

Graeme Bolin, CBRE’s head of occupier and leasing, industrial and logistics services for Singapore, said that there are limited prime logistics project completions and this has led to strong competition for space in modern ramp-up logistics developments.

The future supply pipeline continues to be constrained, with only two logistics developments slated for completion in 2024 – the Logos eHub (Phase 2) located at 4 Pandan Crescent with 80,825 square metres (sq m), and Pokka Logistics Hub located at 4 Benoi Crescent with 64,490 sq m.

Another segment that did well this year is the multiple-user factory segment, said Colliers Singapore’s head of research Catherine He. She attributed this strong growth to newer projects and demand from biomedical and tech-related firms, resulting in a rental growth of 8.3 per cent in the year to date.

Savills’ Cheong added that “the multiple-user space did well because of the need for companies to right-size their industrial space usage as they seek to reduce overheads”.

Underperformer

On the other hand, business parks continued to underperform this year, said analysts.

“Rents for business park space have seen the most tepid growth, on the back of negative net demand for the past three quarters of 2023,” said Colliers’ He.

She pointed to an estimated 4.41 million square feet (sq ft) of business park space coming on stream in the next two years, exacerbating the already high vacancy rate in the market, especially in the outlying business park spaces. Almost 92 per cent of the new supply will be coming from the Punggol Digital District (2.52 million sq ft) and the revamped Science Park (1.52 million sq ft).

As at Q3, vacancy at business parks on the city fringe has remained resilient at 5.3 per cent, while those in the suburban areas have seen vacancy rates shoot up to about 24.9 per cent.  

C&W’s Ong attributed the rising vacancy and stagnating rents at the outlying business park spaces to occupiers right-sizing their spaces amid falling utilisation rates due to hybrid work.

She noted that city-fringe and newer business parks may see rental growth of up to 2 per cent in 2024, while older suburban business parks could see flat rental growth next year. “Newer suburban business parks that are more accessible and have nearby amenities are well-occupied and are able to command higher rents compared with their older counterparts.”

Investment sales

In the capital market, investors continue to pursue industrial asset acquisition opportunities given the positive yield spread against the current high interest rates, said Tay Huey Ying, JLL’s head of research and consultancy.  

As at Nov 28, JLL’s data showed S$2.17 billion worth of industrial properties transacted thus far, representing about 86 per cent of the S$2.54 billion achieved in 2022.

The top deals inked were ESR-Logos Reit’s portfolio sale of five warehouses (S$313.50 million), the sale-and-leaseback of The Shugart (a business park development) for S$218.24 million, and the sale of HB Centre 1 and 2 (S$115 million), noted Tay.

Rimon Ambarchi, CBRE’s head of industrial and logistics services for Singapore and South-east Asia, saw sustained and significant investment interest in institutional-grade industrial properties in 2023. 

“In the current market, where interest rates are high and economic growth is facing headwinds, investors are placing greater focus on higher-yielding, income-based investments to generate their returns,” he said.

“Relative to most of the other major developed markets around the world, Singapore’s industrial properties, being on a leasehold basis, have been able to provide higher rental yields that are above interest cost. This advantage is further supported by the strong fundamentals in the industrial sector – robust demand, manageable supply pipeline and positive rental trajectory,” he added.

Outlook

Next year, the industrial sector may see some oversupply.

About 11.3 million sq ft of gross floor area (GFA) for single-user factories is expected to be completed, higher than the five-year annual average supply of 4.5 million sq ft.  

For business parks space, new supply is about 1.9 million sq ft of GFA, which is higher than the five-year annual average supply of 590,000 sq ft. 

“Some indigestion in these two segments of the industrial market is expected in 2024,” cautioned Savills’ Cheong, pointing to the possibility that the market may not be able to absorb the available supply.

C&W’s Ong said: “Niche sectors such as self-storage, data centres and cold chains, which have non-cyclical demand drivers, continue to be an attractive investment opportunity, though there is limited stock for sale as most owners are holding for the long term.”

Ong also noted emerging interest among third-party logistics players to secure sites for their expansion. Given the spike in prime logistics rents over the last two years, some players are developing sites themselves or partnering with a developer and taking on a long-term lease to manage costs.

CBRE’s Ambarchi expected industrial yields and prices to remain strong next year, supported by continued rental growth momentum, peaking interest rates and improvements in key manufacturing indicators.

Strong appetite for high-quality, institutional-grade industrial properties will continue to drive industrial capital market investment, he added.