What to watch in Singapore’s industrial and logistics space this year

INFLATION, resilience to supply chain disruption and cost control are expected to be key themes for the industrial and logistics (warehousing) space sector in 2023.

On the demand side, the industries that are expected to do well this year are advanced manufacturing, food and novel food consumer services, as well as logistics and supply chain.

Inflation

Inflation can have a significant impact on industrial space demand. With heightened inflation, as the cost of goods and services increases, the attendant rise in production costs may lead businesses to secure additional industrial space to store materials, equipment and finished goods.

Also, as the economy grows and businesses expand, they may require more industrial space to accommodate their growth. This increased demand for industrial space can lead to higher rents and occupancy rates for industrial properties such as factories, manufacturing plants and warehouses.

In addition to higher production costs, inflation may lead to changes in consumer spending patterns. For example, when prices of consumer goods increase, consumers may be more likely to purchase these items online and have them delivered to their homes.

As more source globally for the best prices, domestic demand for logistics services will also increase, as e-commerce businesses may need more warehouses and distribution centres, which function as transit points in the last-mile delivery process.

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However, if inflation turns supercritical, it can have a negative impact on the economy as businesses reduce their spending, resulting in lowered demand for industrial space.

In summary, inflation can have both positive and negative impacts on industrial space demand, depending on its level and the overall economic conditions.

And while inflation for goods and commodities appears to be slowing or even declining, there is an increasing risk that inflation in the service sector could take centre stage.

Building resilience to supply chain disruption

Having learned the hard way from the outbreak of Covid-19, industrial and logistics space users are continuing to assign greater weightage to developing resilience measures against business disruptions.

This should expand the relationship between space demand and economic performance; even if the economy were to slow, the need to build resilience would hamper any decline in demand.

As companies continue building resilience in the supply chain, the use of technology and adoption of automation will be accelerated, and we should expect a greater concentration of activity in the modern logistics space sub-sector.

Cost control

Tenants are being forced to go through their operating costs with a fine-tooth comb, as economic conditions turn challenging, labour supply tightens further, and higher interest rates start to bite.

On the real estate front, there are a few courses of action that companies can adopt.

First, they can choose to not take up spaces that they had earlier signalled intention to.

Second, companies can consolidate their operations either locally or, if they cannot find sufficient space, in Malaysia. Across the Causeway, a popular area is the city of Nusajaya in Johor, where businesses have been opting to either buy land and construct their facilities or acquire ready-built factories.

Striving to control costs can also create demand by certain trades, such as the food and beverage industry. With labour harder to come by and therefore becoming more expensive, restaurateurs and other eateries have started to outsource food production to central kitchens.

The increasing risk of inflation in service costs, as highlighted earlier, is likely to benefit satellite food-production bases.

While there is a need to control costs, economic players can contain cost push pressures by transferring them from commercial to industrial spaces. This is expected to benefit the industrial space market.

Sectors to watch in 2023

Advanced manufacturing

Manufacturing accounts for 20 per cent of Singapore’s gross domestic product (GDP) and is an important pillar of growth for the economy. Through years of investing in a robust manufacturing ecosystem, skilled talent base and government support in research and innovation, Singapore has achieved growth capacity in the value chain of advanced manufacturing.

Activities involving information communication technology, automation, computation, 3D printing (additive manufacturing), sensing and networking, are expected to expand in volume.

Industries in electronics, semiconductors, robotics, pharmaceuticals, medical products, fast-moving consumer goods and aerospace engineering are expected to be drivers of the economy, pushing demand for high-spec industrial spaces.

Food and novel food consumer services

The government’s 30-by-30 Plan, to build the capability and capacity of Singapore’s agri-food industry, aims to have 30 per cent of the country’s nutritional needs produced locally and sustainably by 2030. At the plan’s core is a push for a holistic food-related infrastructure.

Given the strong government support, this will lead to an increase in demand for higher-quality food facility spaces, both from local and international players.

Also, with the refreshed Food Services Industry Transformation Map (ITM) 2025, focus will shift towards catalysing innovation to create new revenue streams among enterprises, encouraging food companies to capture new growth opportunities. Brick-and-mortar space offerings need to pivot towards facilitating online delivery platforms, last-mile delivery, and more flexible and mixed-use of physical spaces.

Logistics and supply chain

Supply chain has been put through a series of severe tests. Companies are having to deal with huge demand volatility, triggering short and varied cycles of decision-making. With the lessons learnt, different companies are responding in varied ways – from securing supply at any cost to building inventory stockpiles and re-aligning supply markets to avoid disruptions by any lockdown or other incident.

As companies look to build resilience through just-in-case inventory management, more warehouse space will be needed to keep the increased volume of goods on hand.

This shift will support robust absorption, further aggravating the existing shortage of ramp-up and good-quality warehouse space.

Outlook

Although economic conditions are becoming ever more challenging by the month, the outlook for industrial and logistics facilities in Singapore should be driven by a tug-of-war between companies that can adapt to the new clime and those that struggle under the changing circumstances.

One should also be mindful of the pandemic-induced supply backlog coming on line in 2023; this should provide additional choices for end-users to choose from.

On balance, we believe that rents this year will rise, given the strong demand for logistics and food factory space, plus an environment where inflation will weave its influence on rents.

Alan Cheong is executive director, research and consultancy; Sally Tan is managing director, commercial, industrial and logistics at Savills Singapore.