Demand pushes occupancy for high-specs industrial space to near-full capacity in 2021

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/ EdgeProp Singapore
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December 27, 2021 5:30 AM SGT
Limited prime logistics space has prompted some occupiers to turn to older warehouses, such as some of these older industrial properties along International Road. (Picture: Samuel Isaac Chua/The Edge Singapore)
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SINGAPORE (EDGEPROP) - The industrial real estate market in Singapore saw marginal but steady growth in terms of rents and occupancies throughout 2021. This positive performance is in line with the broad recovery of the Singapore economy this year, with the Ministry of Trade and Industry expecting gross domestic product growth to clock in at around 7% for the whole of 2021.
According to Tricia Song, head of research, Southeast Asia, at CBRE, there has been an increase for all industrial rents across all segments in 2021, and this growth is propelled by several active economic sectors this year.
The multiple-user factory segment saw a 0.3% q-o-q increase in its rental index in 3Q2021, while the single-user factory segment recorded a 0.6% q-o-q increase in its rental index. Overall, the industrial property market clocked in a 0.7% q-o-q increase in the rental index last quarter.
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CBRE research shows that the semiconductor segment received a boost amid a global shortage in semiconductor chips, coupled with a rise in demand from cloud services and a gradual roll-out of 5G services around the world.
The consultancy also notes that a thriving pharmaceutical and biomedical industry led an increase in leasing demand from manufacturers of medical gloves and masks, as the global pharmaceutical trade in related Covid-19 sectors remains active.
JTC rental index - EDGEPROP SINGAPORE
E-commerce continued to grow as well, says CBRE, and this led to a high take-up rate for warehouse facilities by third-party logistics companies in Singapore. A rising demand for online grocery shopping has also highlighted the importance of cold-chain logistics, the logistics process for products that require refrigeration.
In its 3Q2021 industrial market report, JTC says that demand for industrial space in Singapore is projected to increase next year. While a potential rise in the overall occupancy rate may be tempered by new factory and industrial development completions in 2022, incoming supply may be disrupted by possible delays in expected completions, says JTC.
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“As vendors are accumulating more stocks to meet their production needs and keep their finished and unfinished products, in view of the disruption, this has resulted in the surging demand for warehouse space,” says Lynus Pook, senior director, Regional Industrial Advisory, Asia, at Colliers International.

Leasing demand for older warehouses picks up

The availability of prime logistics space in Singapore over the past year has been extremely limited, with occupancy rates close to full capacity. According to Song, modern ramp-up warehouses featuring high specifications reached near-full capacity this year.
“Thus, due to overwhelming demand for storage space, occupiers are now turning to general warehousing space of older specifications, for example, warehouses with cargo lifts instead of modern ramp-up warehousing facilities,’ she says.
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She adds that some occupiers have turned to production spaces as an alternative if the space fulfils their storage requirements.
However, Pook says that these second-tier warehouse spaces, which account for about 70% of all industrial properties in Singapore, did not see a corresponding increase in rents this year as such assets are older-generation industrial space that tends to be less efficient. (Check all latest Singapore property Market Trends)
“The strong leasing activity is likely to carry into 2022 and beyond. In Singapore, 80% of the industrial properties are owned by JTC. While only end-users can acquire such properties, they can only sublet 30% of the excess space to third-party users,” he says.
JTC SUMMIT - EDGEPROP SINGAPORE
(Picture: Samuel Isaac Chua/The Edge Singapore)
The relatively short land tenure awarded to new warehouse developments, which typically have a lease duration of no more than 20 years, means there is little incentive for developers to venture into this asset class in Singapore, says Pook. “As a result, there is a significant lack of new warehouses in the pipeline.”

Industrial spaces need to upgrade to meet future industry requirements

For the whole of 2021, general factory space, which usually consists of single-user factories, traditional flatted factories, and ramp-up factories, recorded a relatively positive run in 2021. Based on JTC’s rental index, this segment recorded two consecutive quarters of rental growth. It increased by 0.9% q-o-q in 2Q2021, and 2.2% q-o-q in 3Q2021.
CBRE expects sustained growth in manufacturing and wholesale trade sectors will likely underpin demand for this class of factory space in 2022.
However, CBRE says that a two-tier market for such factory buildings will become more pronounced as industrialists turn to higher-specifications facilities to conduct manufacturing in the future, making older and unimproved spaces obsolete.
“With the manufacturing profile and demand from occupiers evolving at a faster rate over the past few years, the two-tier market which exists among industrial properties will be more apparent. It will be important for landlords to upgrade their older assets to higher specifications in line with Industry 4.0 standards,” says CBRE’s Song.
This is a sentiment that is also shared by Colliers’ Pook, who has a starker outlook for unimproved factory spaces. “In fact, all industrial properties in Singapore will become obsolete over the next few years, as the manufacturing sector evolves to include the production of more high-tech products and equipment,” he says.

Notable new completions

The business park segment saw a few notable new completions this year that accompanied a strong rental and occupier performance. In 3Q2021, Grab Holdings opened its new headquarters at 1 and 3 Media Close in the one-north district. Razer also opened its Southeast Asian headquarters at 1 One-North Crescent in the one-north district in October this year.
“We have seen a strong uptick from the expanding technology sector in Singapore and the likes of Xiaomi, Tencent, ByteDance, Shopee, Razer, among others, are setting up their regional headquarters in Singapore. For some of these companies, their front offices could be located within the CBD, but most of their production and back offices are still within business parks,” says Pook. He expects the supply of available business park space to remain very tight until 2024, when new developments in the future Punggol Digital District are completed.
Song also notes an emerging two-tier market in the business park space. The most leasing demand is concentrated within city-fringe submarkets like one-north due to its central location and higher building specifications, compared to the rest of the submarket locations in Singapore where leasing demand is more subdued.
ONE NORTH OVERVIEW - EDGEPROP SINGAPORE
An emerging two-tier market in the business park segment has concentrated most leasing demand in city-fringe submarkets such as one-north. (Picture: Samuel Isaac Chua/The Edge Singapore)

Construction delays likely to persist

Looking ahead, Song expects construction delays to persist in the local industrial property market. “Some of the [industrial buildings], which were originally scheduled to be completed in 2H2021, had their completion dates shifted to next year,” she says. As at 3Q2021, total factory and warehouse pipelines are projected to increase to 7.57 million sq ft and 3.28 million sq ft respectively in 2022, compared to 6.1 million sq ft and 2.85 million sq ft respectively as at 2Q2021.
Song also expects to see strong leasing and investment demand coming from companies in the life sciences industry. This comes on the back of the rapid growth of this sector across the Asia Pacific region over the past two years, and a steady flow of mergers and acquisitions activity. “The pandemic has accelerated the growth of the life sciences industry, with rapidly mutating variants necessitating more research and therapy, and more investors are looking into this sector in Singapore. For example, Lendlease has announced that it is commencing construction of a large-scale, greenfield vaccine facility, a move that will boost Singapore’s development of its biopharmaceutical sector,” she says.
Meanwhile, the semiconductor and food-related sectors, as well as distribution centres, are expected to continue to lead the pack in terms of leasing demand and industrial investment activity over the next two years, says Colliers’ Pook.
“Stakeholders in the industry should also be watchful of high oil prices, increasing material costs, or a potential labour crunch, that could negatively affect the growth outlook of Singapore’s industrial real estate market in the near term,” he says.
Song says: “We expect industrial prices to move up in line with rental growth in 2022. While activity should remain buoyant, prime logistics asset price growth is likely to slow down after outperforming in 2021, and as other asset classes such as offices start to look more attractive.”

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