A period of over-supply is looming for industrial property, with rental estimates for the final quarter of last year pointing to levels below those in the third quarter.
Demand for factory space has weakened in line with the contracting manufacturing sector, amid fewer calls for business park units, given the uncertain economic climate.
"It trickles down to the business park and industrial space market," said Mr Alan Cheong, Savills Singapore research head, adding that "these are challenging times for businesses".
He said: "Until global economies show stronger growth, companies will labour under the yoke of deflationary pressures on the revenue side and high labour costs."
Rents of multiple-user factory space suffered their second consecutive decline in the fourth quarter, capping a miserable year, according to DTZ yesterday. Monthly rents of first-storey factory units were down 4.5 per cent for the whole of 2015 while those for upper-storey space were down 5.7 per cent.
Falling orders from domestic and overseas markets have hit the manufacturing sector, hurting demand for such spaces. The Purchasing Managers' Index this month showed that manufacturing has contracted for six straight months since June last year.
But the weakening is also specific to certain locations, noted Mr Cheong of Savills.
Demand for central area factory space appears firm but outlying areas, including Changi and Jurong, may face more challenges this year.
Space around Jurong, for example, may be dependent on the beleaguered oil and gas industry.
The occupancy rate in the central area is about 95 per cent, with average rents maintained at about $1.80 per sq ft (psf) per month, said Mr Cheong. Many of the companies there are IT-related or stockists for engineering or computer parts.
For multi-user factories in the East and West with a heavier concentration of manufacturers related to the oil and gas and marine sectors, monthly rents should fall 3 per cent to 5 per cent this year to around $1.30 psf. If not, occupancy levels may also fall from about 93 per cent to 88 per cent.
Companies adopting 'wait-and-see approach'
Some bright spots for factory demand this year could come from companies in 3D printing, surface mount technology or those related to the growing e-commerce sector such as supply-chain management providers, said Mr Cheong.
Meanwhile, rents for business parks and high-tech industrial space declined in the fourth quarter, the first time they have fallen since the third quarter of 2012, said DTZ Research.
Rents for high-tech space were up 1.6 per cent over 2015 but those for business parks fell 0.4 per cent.
Dr Lee Nai Jia, regional head of research for DTZ, said: "In the first half of 2015, demand for business park and high-tech industrial space was supported by companies substituting quality business park space for office space to reduce cost."
Google, for example, is set to move from the Central Business District to Mapletree Business City II when it is completed this year.
But demand for business park space fell sharply in the third quarter. "Companies are adopting a wait-and-see approach especially as there will be more options this year," said Dr Lee.
Rents at business parks should face more downward pressure, with about 1.5 million sq ft of lettable space being completed this year. But in the near term, industrial real estate investment trusts (Reits) may still be partly shielded from these challenges.
"Their portfolios are diversified both in terms of tenant mix and staggered lease tenures," said Mr Cheong of Savills.