Logistics outlook suggests local industrial sector is becoming more tenant friendly

Despite being under great downward pressure from suffering weaker re-export demand, Singapore’s industrial sector ranked among the top 5 most expensive list in 2021 Global Logistics Outlook

Cushman & Wakefield (C&W) has released its 2021 Global Logistics Outlook. The report analyzes key drivers affecting growth, global leasing dynamics and provides a logistics outlook for the industry.     

“The unprecedented disruption caused by COVID-19 pandemic and changing consumer behaviors has reshaped the future of the logistics industry by exposing global supply chain vulnerabilities and accelerating technological advances. As a result, a variety of global trends have emerged, propelling the sector forward in new ways,” said Cushman & Wakefield’s Jason Tolliver, Investor Lead, Logistics & Industrial Services, Americas.  

APAC  

In broad terms, the regional industrial market remains resilient. Out of the 34 key markets covered within Asia Pacific, 15 are considered landlord-favorable with six being tenant favorable and the remaining 13 in neutral territory. The status quo has largely been maintained year-to-date, with only Singapore showing any significant change to becoming more tenant friendly, though this is restricted to certain parts of the industrial market. This is in stark contrast to the office sector within the region, which has seen a much more definitive shift towards more tenant-friendly conditions. 

“Industrial rents have shown steady growth in the year-to-date in key Indian and South East Asian markets where rents in Delhi, Ho Chi Minh City, Kolkata, and Hanoi have all increased by over 2.5%. Rents have been held broadly flat in Australia while they have seen a slight uptick of 2% in the Chinese logistics market, due to boosted demand from online shopping soaking up some of the vacancy,” said Dr. Dominic Brown, Global Head of Demographic Insights, APAC-lead for Cushman & Wakefield. “Markets like Hong Kong and Singapore rank second and fifth respectively on the most expensive list, despite being under great downward pressure from suffering weaker re-export demand. Hyderabad and Ahmedabad top the least expensive markets list, along with six other Indian markets.” 

North America 

The North American industrial market experienced growth despite the COVID-19 pandemic wreaking havoc across the globe, as well as more local disruptions including hurricanes and wildfires. It has proven once again to be one of the most resilient asset types. Although North American new supply outpaced demand for the second year in a row, with 378 million square feet (msf) of completions, demand came in at 287 msf, surpassing 200 msf for the seventh consecutive year. 

“COVID-19-induced lockdowns did cause a slight slowdown in demand in the first half of the year compared to prior years. However, even this combined with the large volume of supply has still not been enough to fully satiate tenant demand and to allow vacancy rates to begin to rise significantly,” said Tolliver. “Toward the end of 2020, North American industrial vacancy stood at 4.9%—just a 30 bps increase over 2019 and Canadian markets registered the lowest vacancy rates at 2.5% and Mexico City following at 3.0%.” 

EMEA 

“Europe’s logistics sector is grappling with supply constraints, stemming from a combination of a lack of developable land and strict planning regimes. In contrast to pre-Global Financial Crisis (GFC) when speculative development represented roughly 80% of new construction, post-GFC has been characterized by predominantly built-to-suit development that has led to severe supply shortages in most of Europe’s core logistics markets. As speculative construction resumed post-lockdowns more product came to market, pent up demand was released and leasing activity accelerated,” said Lisa Graham, Head of EMEA Industrial Research for Cushman & Wakefield.  

Based on year-end data, vacancy continues to trend downward in most of Europe’s key logistics hubs. Vacancy of approximately 4% in Dutch and UK markets and vacancy hovering around 2% in Rotterdam, Lyon, Prague and Budapest, points to a severe lack of stock that, so far, a rise in speculative construction has been unable to alleviate. Furthermore, increased demand from e-retailers and 3PLs, as they expand their logistics footprint, has offset any vacancies created through tenant bankruptcies during 2020. 

“The global logistics sector not only showed resilience during the strict first half lockdowns, but went on to benefit from consumer and business reactions to the pandemic during second half. Broadening e-commerce, both geographically and by product range, will be a key driver of new space demand over the next decade,” added Dr. Brown. “In a post-COVID-19 world, there will be greater focus on using real estate to leverage cost across the whole supply chain, better positioning businesses as they navigate a B2C business model, reshoring, inventory management, labor issues, transportation and ESG. Together, these factors will govern location strategy.” 

Mr Paul Ho, chief officer at iCompareLoan, said: “the industrial sector is taking a more defensive strategy, but still the logistics outlook suggests industrial market is among the most resilient of sectors.”

The JTC All Industrial Rental Index grew for the second consecutive quarter by 0.6% q-o-q in Q1 2021. This is in line with Singapore’s expected economic recovery. Rental growth was observed across both the factory and warehouse submarkets. The JTC Single-User and Multiple-User Factory Rental Index increased by 0.2% and 0.8% q-o-q respectively, while the JTC Warehouse Rental Index rose by 0.5% q-o-q.

CBRE Research commenting on the latest JTC All Industrial Rental Index noted resilience in factory and warehouse rents in the same quarter, with stable leasing activity observed particularly for high-specs factory and prime logistics projects.

Overall industrial occupancy rose by 0.1 percentage points q-o-q to 90.0% in Q1 2021. The growth was attributed to the multiple-user factory submarket, which saw a 0.5 percentage point increase to 89.0% contributed by improving demand and project delays.

On the flipside, both single-user factory and warehouse occupancy fell marginally this quarter by 0.1 percentage points. This was contributed by project completions in the quarter, including six single-user factory completions in Q1 2021, although all were relatively small-scaled (each below 0.20 mil sq. ft.). In addition, a net supply of 0.75 mil sq. ft. was noted for the warehouse submarket on the back of three completions in the quarter, the most significant being the partial TOP of Cogent Jurong Island Logistics Hub (0.34 mil sq. ft.).

Moving forward, upcoming factory supply for Q2 – Q4 2021 is estimated at 8.58 mil sq. ft., its highest since 2017 due to completion delays vis-à-vis the COVID-19 pandemic. While the saturated factory pipeline may place some pressure on rents with several large-scale multiple-user factory projects expected to be completed this year, the positive outlook for Singapore’s manufacturing sector could lend support to rents. In addition, while the factory submarket remains two-tier, high-specs factory buildings will continue to see sustained demand, supported by the electronics, precision engineering and biomedical manufacturing segments.

On the other hand, the overall warehouse pipeline appears to be manageable, with 3.53 mil sq. ft. of stock estimated to come onstream from Q2 – Q4 2021. The upcoming supply is expected to be absorbed gradually by the market, against a backdrop of tight prime logistics vacancy and healthy demand for the warehouse market from third-party logistics, food logistics and e-commerce players. With these observations in mind, CBRE Research expects warehouse rents to remain resilient in the coming quarters.

Overall, the logistics outlook for the industrial sector appears sanguine in line with the expected economic recovery, with both factory and warehouse rents poised to remain resilient and even exhibit some growth, noted CBRE Research. Prime logistics rents will continue to perform on the back of strong demand, with full-year rental growth expected for the segment.

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