Demand is solid, but vacancy rises due to supply side pressures

Increasing headwinds are starting to weigh on occupier activity, but demand remains resilient in some markets. Across mature markets1 , net absorption reached 1.3 million sqm in 4Q22. This is marginally down from the 1.4 million sqm in 3Q22, but in line with quarterly net absorption in the previous 12-month period.

Supply levels remain elevated. Many projects that were delayed due to COVID-19 completed in the quarter. Given rising supply, vacancy trended up across the region. Across mature markets, vacancy rose above long-term equilibrium for the first time since 2019. With the regional supply pipeline expected to peak in 2023, vacancy is forecast to remain elevated in the near term.

Fastest rental growth on record

The upward rental growth trajectory continued in 4Q22, albeit at a slower pace compared to previous quarters. Nonetheless, 2022 marks the likely peak in the regional rental growth cycle. Asia Pacific rents rose by 7.2%, up from 3.4% in 2021. Looking forward, rental growth is expected to moderate to 3.8% in 2023, and rising vacancy will likely limit regional growth in 2024 as well.

At a market level, rents trended up in most markets despite an increasingly challenging macroenvironment. Rents grew at a modest pace across Greater China, rising between 0.5% and 1.1% q-o-q across the major cities. Tokyo rents increased modestly in the quarter. In Seoul, despite significant supply, inflationary pressures coupled with surging construction costs pushed rents higher. Rents also increased in Singapore. Sydney and Melbourne rents continued their strong upward trend, but at a slower pace than in previous quarters.

Volumes fall as macro-headwinds bite

Investment activity slowed further as higher capital costs weighed on investment thresholds and hurdle rates. There was muted activity across Greater China, although sentiment remains broadly positive. Tokyo remains one of the more attractive markets for investors. However, available assets remain limited compared with demand, and activity is relatively muted. There were some large recorded deals in Seoul, although overall deal volume is relatively low. Similarly, while quarterly transaction volumes are volatile, volumes dipped in Sydney and Melbourne. Price discovery is difficult, and many investors are adopting a ‘wait and see’ approach. In Singapore, investors and end-users were still acquiring logistics/ warehouse assets, but they have become more selective.

Rising interest rates were the catalyst for the start of the yield decompression cycle in some markets. Australia, South Korea, and New Zealand recorded sharp decompression. This weighed on capital value growth. However, yields in other markets remained steady, supporting modest capital value growth given a rising rental growth profile.

Resilient outlook amidst gathering headwinds

Occupier demand will slow in 2023. While the long-term growth trajectory for e-commerce is positive, demand from this group will likely moderate this year. Many groups expanded rapidly between 2020-2022 as online consumption surged. However, there are now signs of excess capacity as economic headwinds such as rising interest rates and inflation weigh on consumption growth. The regional supply pipeline will peak in 2023, resulting in rising vacancy across the region. This will slow the rapid pace of rental growth recorded last year, marking 2022 as the peak in the regional rent cycle.

Investment markets will remain subdued. Many investors will need to review their discount and hurdle rates. However, this will be challenging in the current volatile environment. With pricing uncertainty, many investors will adopt a more cautious approach when reviewing potential acquisitions. Nonetheless, we may see some selective buying opportunities in submarkets where investors see upside value growth, or in markets where conditions are more stable.