All Industrial:

The JTC All Industrial rental index continued its fifteenth consecutive quarter of growth in Q2 2024, surpassing its fourteen-quarter run from Q4 2009 to Q1 2013. The rental index rose by 1.0% q-o-q, slowing down from the 1.7% q-o-q registered in the previous quarter, the slowest quarterly growth since 1Q 2022.

Rental growth was positive across all segments, except for a slight decline in the business park segment. This is in line with marginal increases in occupancy across all segments. Multiple and single-user factory drove overall industrial rental growth at 1.5% q-o-q and 1.3% q-o-q respectively, while business park rents eased 0.1% after recording its highest quarterly growth (+2.1%) since 2Q 2017 in the previous quarter.

The price index grew by 1.2% q-o-q, reversing the 0.2% decline in the previous quarter to reach its highest level since 4Q 2015.

Both rental and price growth are expected to moderate in light of slowing global growth and higher supply.

Warehouse:

The warehouse segment registered marginal increases in rent (+ 0.5% q-o-q) and occupancy (+ 20 basis points) to 91.3% from the previous quarter.

Rental growth has slowed as more space is made available; some tenants have downsized or given up space in light of elevated rents, especially in prime logistics where rents have grown by close to 40% since 2020. This can also be attributed to the impact of higher interest rates and a softer labour market where businesses and consumers are investing and spending with caution. As such, there has been a slowdown in e-commerce and less buildup of inventory. Stiff competition amongst third party logistics players (3PLs) have also eroded margins and affected some of these businesses.

Further, there is a deluge of supply (0.85 mil sqm) coming on stream in 2025, the highest since 2017 (0.96 mil sqm). With more options available, occupancy rates and rents for warehouses will inevitably ease further.

Factories:

The rental indices for multiple-user/single-user factory have risen by 1.5%/1.3% q-o-q respectively, to come in at 7.3%/6.2% y-o-y.

Demand at multiple-user factories, especially higher specification spaces, were driven by commitments from small incremental tenants in the biomedical and semiconductor sectors.

For single-user factories, there is over 1 mil sqm of supply coming on stream up till 2025 though these are typically developed by end-users themselves; demand in this segment has been boosted by advanced manufacturing players. Global names such as Shimano, Pall Corp, and AstraZeneca have announced plans to set up facilities. Notably, on the back of the electronics cycle upturn, major chip players such as Applied Materials and Vanguard have also increased their commitments here, displaying confidence in Singapore as an advanced manufacturing hub.

However, with overall softer demand and higher supply, rental and price growth for both types are likely to slow going forward.

Business Parks:

Business Park rents have registered a marginal decline of 0.1% q-o-q in Q2 2024, a marked slowdown from the 2.1% growth in the previous quarter. On the other hand, occupancy has risen by 20 bps to 78.3% this quarter. The higher vacancies could be attributed to the outlying and older business parks, whose weaker performance could weigh down on overall rents.

Demand has been generally muted in the business park segment with only small requirements. Apart from right-sizing and the impact of flexible working, movements are driven by flight to quality as tenants prefer better located and newer offices. Some projects are also throwing in incentives such as fit-out capex and/or longer rent-free periods to attract tenants.

The business park segment is inundated with supply of almost 3.5 mil sq m set to come on stream from now till 2025. Notably, PDD will contribute over 2 mil sf of BP space to the market over two phases to be completed in 4Q 24 (1.3 mil sf) and 4Q 25 (0.74 mil sf). Out of this, two thirds of the space has been reportedly pre-leased to tenants from cyber security, AI, robotics, fintech, government linked entities and banks.

Demand at business parks could pick up in tandem with the anticipated economic recovery, as well as with newly completed projects in the later part of the year which will drive leasing activity. Moderate rental growth will be driven by the higher rents commanded at newer and better located projects.

Outlook:

There will continue to be a surge in supply; from 2024 to 2026, there is an average annual supply of 1.1 mil sqm industrial space coming on stream, exceeding the average annual supply and demand of 0.9 mil sqm and 0.6 mil sqm respectively over the past three years.

This catchup in supply has led to the present supply-demand imbalance with segments of the market now seeing stock with low precommitments or completed projects with low occupancy. Further, occupiers are increasingly prudent about their space take-up with landlords having to throw in incentives such as capex fit-outs or rental promotions to attract tenants.

The silver lining is that Singapore’s manufacturing sector rebounded in 2Q24, and a gradual recovery is expected in the second half of 2024. In particular, electronics, which accounts for almost half of overall manufacturing production, is catching up after correcting in 1Q24. As semiconductor and manufacturing giants expand operations here, this could attract more foreign suppliers, while allowing more local suppliers to grow their capacities and capabilities, helping to uplift the entire industrial sector.

The general outlook for the industrial sector appears optimistic, although there may be some volatility stemming from heightened protectionism affecting global trade as well as uncertainty from the timing and extent of upcoming US interest rate cuts. On the other hand, Singapore stands to benefit from this trend as firms look for a stable and geopolitically neutral location to diversify their risks or set up operations. There is also a premium attached to goods manufactured here, especially in the biomedical space.

Leasing demand is expected to pick up in tandem with an improving manufacturing sector and a pickup in sentiments. However, rental growth is expected to moderate in light of occupier cost sensitivity and pressure from incoming supply. There have also been more renewals and consolidations than relocations or expansions, signaling the financial constraints occupiers are facing.

The higher cost environment has increased the need for operational efficiency and cost management, driving demand for high quality modern industrial assets. As such, there will likely be more redevelopments and refurbishments of older assets in view of the preference for high quality modern industrial facilities.

With more options available to tenants, landlords may have to soften rents, offer more incentives, or be more flexible to smaller requirements. On the investment front, there is likely to be more sale and leaseback transactions or portfolio sales to free up capital.

In light of slower global growth under higher capital costs, Colliers is projecting the overall annual industrial rent growth for 2024 to moderate to between 3 to 5% (from 8.9% recorded in 2023) and price growth to between 1 to 3% (from 5.1% in 2023).

For further information, please contact Catherine He, Head of Research, Colliers Singapore as the details below.

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