Weaker Demand Business Parks Weigh Industrial Rents Growth Slowing 1 Q O Q 2Q2024
In the second quarter of 2024, JTC’s quarterly market report revealed that the industrial sector experienced a 1% increase in rents quarter-on-quarter, which is a slower growth rate compared to the 1.7% growth in the previous quarter. This marks the slowest quarterly rental growth rate since the first quarter of 2022, following the post-COVID recovery. Year-on-year, rents grew by 6.6% in the second quarter of 2024, compared to 7.8% growth during the same period last year.
According to Chua Yang Liang, JLL’s head of research and consultancy for Southeast Asia, the slower quarterly rental growth is due to weaker demand for business park space. Rents for business parks saw a marginal decrease of 0.1% in the second quarter of 2024, which is a slowdown from the 2.1% growth in the first quarter of 2024.
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JTC data shows that the business park vacancy rate slightly declined to 21.7% in the second quarter of 2024 from 22% in the previous quarter. Tricia Song, CBRE’s head of research for Southeast Asia, points out the “patchy” performance of business parks, with the average vacancy rate at one-north being 9% in the second quarter of 2024, approximately 30% at Changi Business Park in the east, and close to 40% at International Business Park in Jurong in the west.
Increased pressure on business park rents is expected in the latter half of the year as non-renewals on lease expiry in specific buildings will lead to a spike in vacancy. Additionally, a higher volume of completions from the second half of 2024 to 2025 will contribute to a more competitive leasing environment. CBRE’s Song says, “The prevailing economic challenges, high-cost environment, and continued work-from-home measures will continue to dilute occupiers’ space requirements.”
Leonard Tay, head of research at Knight Frank Singapore, believes that business park rents have been dragged down by older business parks in the east and west of Singapore, which have come under pressure. On the other hand, he observes that business parks with immediate connectivity to MRT stations and are centrally located typically enjoy higher occupancies and command higher rents.
Occupiers are now increasingly cost-sensitive. Rents in the warehouse segment experienced a 0.5% increase as momentum tapered from last quarter’s 2% growth. With steady demand and no major warehouse completions during the quarter, the occupancy rate increased by 0.2 percentage points to 91.3%. Despite the resilient occupancy rates in the warehouse segment, logistics occupiers are now increasingly cost-sensitive and less willing to pay higher rents, says CBRE.
“The cost pressures can be partly attributed to the Red Sea crisis,” Song adds. With vessels taking a detour to avoid Houthi attacks, freight rates have escalated, along with port congestions in Singapore. This has added to supply chain challenges for logistics operators. Nonetheless, landlords are still keen on redevelopment opportunities that aim to convert traditional warehouse developments into prime logistics facilities.
Overall, industrial rents rose due to the continued strong demand for multiple-user factories, which saw a growth of 1.5% quarter-on-quarter, accelerating from the previous quarter’s growth of 1.3%. This resulted in a tight vacancy rate of 8.7% for the segment, the lowest since the first quarter of 2012, according to JLL’s Chua.
The prices of industrial spaces also went up by 1.2% quarter-on-quarter in the second quarter of 2024, reversing the 0.2% decline in the first quarter of 2024. The price gain was led by the multi-user factory segment, which saw a gain of 1.7%. This is the strongest quarterly growth since the first quarter of 2023, says Lee Sze Teck, senior director of data analytics at Huttons Asia. He attributes the growth in the JTC price index to investors looking for better yields.
There was an increased leasing demand of 2.78 million sq ft in the second quarter of 2024. This was supported by the recovery in the manufacturing sector, which saw an expansion of 0.5% year-on-year in the second quarter of 2024, reversing the negative growth in the previous quarter. This is based on advanced estimates from the Ministry of Trade and Industry. Demand exceeded supply during the quarter, resulting in a rise in occupancy rates across the board to 89% in the second quarter of 2024, an increase of 0.3% quarter-on-quarter, according to JTC.
CBRE’s Song says that leasing demand was driven by technology and manufacturing companies, which continue to seek high-spec facilities for their production capabilities. This is also reflected in the 42.1% quarter-on-quarter jump in industrial property transactions to 516 in the second quarter of 2024, particularly for multi-user factory and warehouse spaces. The largest strata sale of a multi-user factory in the quarter was a 13,423 sq ft freehold unit in Amtech Building on Sin Ming Road for $12.5 million ($931 psf).
As of end June, about 8.61 million sq ft of new industrial space is expected to be completed in the second half of 2024. This is lower than the average annual supply of 9.69 million sq ft in the last three years. An additional 18.3 million sq ft of industrial space is expected to come onstream in 2025. In view of the new supply in the pipeline, JTC expects occupancy rates to remain stable for the rest of the year.
The latest Singstat survey (2024) showed that manufacturing businesses and firms in Singapore were less confident about their prospects in the immediate term. “Given the economic weaknesses in Europe and China, businesses are naturally less optimistic,” says JLL’s Chua.
Despite this, Chua believes that the fragmented global trade caused by the US-China trade war should continue to benefit Asia. “It could bring further upside to industrial activity in Southeast Asia, including Singapore, as more firms position themselves to take advantage of trade regionalism here.” He adds that an upside in manufacturing/trade activity in Singapore in the second half of 2024 could support the demand for industrial space despite the expected large supply completion. Rents are likely to remain stable going forward.