Unpacking Singapore’s 2024 Commercial Real Estate Industry Trends

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The first quarter of 2024 is almost past, and Singapore’s commercial real estate industry trends reflect a dynamic scene with renewed activity and potential shifts. 

Highlights
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The office sector shows a recovery trajectory with increased transaction activity yet faces challenges from a significant influx of new supply that may pressure occupancy rates and rent growth.

The retail space is experiencing a resurgence, marked by a decrease in vacancies and an uptick in leasing activities, driven by robust consumer spending and a return to physical shopping environments.

Consumer spending growth challenges the fine dining segment with added pressures from tax hikes and living costs yet suggests an adaptive and hopeful future for the sector.

Demonstrating resilience with sustained rental and price growth, the industrial sector anticipates the introduction of a considerable supply, which necessitates careful monitoring of demand dynamics to maintain stability.

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January marked a pivot with falling interest rates and inflation and a soaring S&P 500, contrasting sharply with the same time the year prior. With a more optimistic economic outlook, investment deal volumes are expected to rise in 2024 as market participants become more active.

Office buildings have been the busiest since early 2020, trendy prime retail spaces along Orchard Road are alive with activity, and restaurants are filling up again, albeit at a cautious pace. Revenge travel sprees lead to tightening of belts locally. But with the continued shifts comes a big question: can this momentum withstand the ups and downs of global economic headwinds? 

The 2024 commercial real estate market prioritises resilience. Global economic shifts drive tenants and investors to seek flexible spaces that enable adaptation. Expect a change beyond transactions, focusing on the sector’s transformative potential.

Both buyers and sellers are adjusting their strategies, moving towards more realistic pricing and commitment levels. 

Singapore, alongside Japan, South Korea, and Australia, emerges as a top market with preferences leaning towards the hospitality, co-living, and logistics sectors. Singapore also continues to attract a diverse investor base, drawn by its stability and economic resilience, with non-institutional investors focusing on long-term capital appreciation.

The residential collective sale market faces hurdles due to a mismatch between seller expectations and developer pricing, influenced by various cost factors. And like residential, commercial collective sales had a reasonably quiet year in 2023, with only 8 successful transactions like Far East Shopping Centre out of 32 properties on the market.

With a significant uptick in sales activity, the office sector signals a robust recovery underway, tempered by a cautious view of future rental growth amidst an influx of new spaces. This anticipates a balancing act between demand and supply, influencing occupancy rates and rental pricing. 

The industrial sector remains resilient, showing growth in rents and prices despite a softer demand, a scenario that highlights the importance of foresight in navigating upcoming supply challenges. 

The market’s sentiment is cautiously optimistic, with the overall sentiment remaining favourable for deal volume growth in Singapore’s real estate market as the undercurrents of economic cycles and the interplay of diverse market forces come.

Current Trends in Commercial Real Estate

Gauging the 2024 commercial real estate, let’s have a look at current trends across sectors.

Office Spaces Rebounds

In the office real estate sector, there’s an uptick in vacancy rates of CBD Grade A offices, rising 1.1 points in 2023. Despite rising vacancy rates, the market remains constrained by limited supply, with relief expected upon the completion of major new developments later in 2024. Most companies will likely lean towards the office space they already have instead of moving or getting more, as employers in specific industries face ongoing rounds of job cuts like the recent ones at Lazada, Google, Amazon, Riot Games and Unilever.

There’s expected to be a lot of movement in 2025 when big companies’ leases end. However, next year, especially later in the year, landlords might need help finding tenants, and vacancy rates could increase when new buildings open. The best office spaces should still be in demand, while the slightly less premium ones might not do as well.

Retail Street Flourishes

A major positive for the 2024 commercial real estate outlook is Singapore’s retail sector, specifically in certain prime areas. Expect prime Singapore retail streets like Orchard Road to continue their impressive comeback with rental growth that is expected to outshine submarkets, with ever-falling vacancies and a continuous surge in leasing activities. After all, Orchard Road recently ranked 12th position as the world’s most expensive retail destination.

Despite a 2% drop in overall retail sales year-to-date as of October 2023, food and alcohol sales surged by 12.2%, thanks to increased tourism. In 2024, retail sales are poised to benefit from events, and Orchard Road retail rents will grow between 3 to 5%, a rebound in tourism from China, government financial support, and easing inflation. However, high mortgage rates and prices may still constrain spending on non-essential items.

F&B Sector Adapts

Singapore’s restaurant scene buzzes with balance in 2024. High-profile debuts and chef partnerships mask cautious optimism for this sector, with new F&B entries (3,616 in 2023) lightly outpacing closures (2,748), but consumer spending growth slows (2.8% vs 3.5% in 2023). 

Since mid-last year, fine dining felt the pinch first with declining reservations (revenge travel + tighter budgets). Rising GST to 9% and Singapore’s “most expensive city” crown has added pressure. 

Past cycles have seen restaurants adapt with fine-casual concepts, nurturing future talents as the industry adapts to cyclical global trends. And, let’s face it, food is a mainstay in Singapore. 

Industrial Supply Increasing

The industrial property market in Singapore has seen significant rent and price increases since late 2020, driven by a lack of high-quality assets even as demand cooled due to higher interest rates in 2023. This suggests that despite lower demand, the scarcity of top-notch properties kept rent prices high.

Looking ahead to 2024, introducing considerably more space (1.4 to 1.6 million square metres compared to 800,000 square metres in 2023) could moderate rent and price increases. This expansion in available space, alongside businesses’ reluctance to face higher rents, may ease the pressure on prices.

Despite these factors, demand for factories and warehouses is expected to stay robust, buoyed by a resurgence in manufacturing and persistent supply chain disruptions. However, the sustained high-interest rates could temper the pace of price growth for industrial spaces.

Singapore Commercial Real Estate Trends Beyond 2024

As we look ahead to 2024 and beyond, the commercial real estate industry faces unique challenges and opportunities that will likely shape its future. This landscape is defined by shifting market demands, technological advancements, and adjusted intergovernmental global policies.

According to JP Morgan Chase, the escalating costs of construction materials and insurance stand out as pressing issues, with these hikes tied to broader economic challenges like inflation and disruptions in the supply chain, which push up expenses for new projects and refurbishments, as well as for insurance, affecting operational budgets. Although there’s an expectation that inflation might decrease in 2024, the enduring nature of these factors could prompt a shift towards more prudent investment approaches and affect decisions related to property development and upkeep.

Deloitte Insights points out a significant hurdle for companies in adhering to Environmental, Social, and Governance (ESG) regulations. The push for sustainability and ethical business operations requires alignment with stricter ESG criteria. Yet, numerous companies are underprepared, lacking the necessary data, procedures, and governance. This shortfall poses a compliance challenge and opens avenues for innovation in sustainable practices.

Commercial real estate is pressing to update its technology and overhaul old systems. With the industry’s growth, there’s an increased need for advanced technology to improve operational efficiency, data analysis, and general business processes. However, modernising or replacing these outdated systems is a significant challenge due to their deep integration into many aspects of real estate operations. Despite the high cost, investing in technological advancements is crucial for maintaining competitiveness and meeting the evolving demands of clients and stakeholders.

Key Takeaways for the 2024 Market Outlook

Cautious optimism reigns, stepping into 2024’s commercial real estate landscape. We see signs of promise with busier offices and thriving retail segments igniting hope for expansion, but rising sustainability costs and tech adoption demand proactive strategies. 

Singapore’s stability and economic strength attract non-institutional investors. Unlike large institutional investors, these individuals focus on specific assets like strata offices and shophouses, seeking long-term capital gains. Their cautious approach minimises leverage, prioritising long-term value over quick exits. They embody the “buy-and-hold” strategy, steadily building their portfolios.

As with many things, balance is the mainstay in life, yet adaptability and forward-thinking are essential for making wise decisions in the commercial real estate market in 2024 and beyond. If you’re eyeing investment opportunities, this is the year to invest confidently.