Logistics and Industrial Market InsightsNovember 29, 2022 / By
Demand is solid, but vacancy rises due to supply side pressures
Occupier demand remained resilient in the face of rising macroeconomic headwinds, with net absorption broadly on par with historic norms. Across mature markets, net absorption q-o-q reached 1.3 million sqm in 3Q22, up from 1.0 million sqm in both 1Q22 and 2Q22. E-commerce groups and 3PL providers continue to be the cornerstone of demand, supported by cold chain operators, retailers, manufacturing groups, and pharmaceutical companies.
Strong demand is backed by equally strong supply, with overall vacancy rising. However, the demand-supply balance has been broadly stable across the mature markets, with only minor vacancy movements. Vacancy increased modestly in Beijing, Tokyo, and Seoul, fell moderately in Shanghai, and remained virtually unchanged in Hong Kong and Singapore.
Fastest rental growth on record
The upward rental growth trajectory continued in 3Q22. While Asia Pacific’s pace of rental growth has lagged behind the US and Europe, average rents rose by 6.5% y-o-y, the fastest pace on record. Rising rents are being supported by accelerating inflation levels. Landlords in some markets are attempting to raise rents in line with CPI growth. Annual or periodic rent escalation clauses are also now increasingly being pegged to inflation in some markets.
While rental growth overall is strong, performance is patchy across the region. Leading the charge is Australia, where very low vacancy (< 1.0%) has driven double digit rental growth in the past 12 months. While the pace will likely slow next year, expected strong demand coupled with limited available supply (a high proportion of upcoming supply is pre-leased) will likely help Australia retain its top ranking as the market with the strongest rental growth in 2023. Conversely, relatively higher vacancy is dampening rental growth across mainland China and Tokyo.
Volumes fall as macro-headwinds bite
Asia Pacific logistics sales continued to moderate in Q3 (from a high base), with just under USD 5.0 billion transacting in the quarter. This brings year-to-date volumes to around USD 20 billion. Despite moderating activity, volumes remain high from a historical perspective. Rising policy rates are increasingly impacting activity, with many regional investors becoming more cautious. Many Limited Partners (LPs) became more selective in 3Q22 and are less willing to deploy new capital, while some General Partners (GPs) are struggling with new fund closings.
However, there are some pockets of resilience. China, Japan, and Southeast Asia continue to see stable yields or even further yield tightening amid strong investor interest. Opportunistic fundraising momentum in the sector is also continuing to gain steam.
Resilient outlook amidst gathering headwinds
L&I occupier demand is forecast to remain resilient, particularly across the more mature markets in the region. While e-commerce will continue to underpin demand, the demand base is also anticipated to broaden to other sectors — cold storage operators and supermarket chains, amongst others, will also help drive take-up levels. Strong demand is forecast to support record AP-wide growth of 7.6% in 2022. A stronger 12.0% is expected across the mature markets.
Despite a strong occupier market, rising macro-headwinds are expected to increase investor caution for L&I real estate. Further moderation in activity is expected in the next 12 months, particularly in markets where yields have reached record-low levels and which are perceived to have more downside risk.
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