Logistics warehousing holds steady despite imminent new supply
05 Nov 2024
Since the opening up of the economy after the lifting of border controls enforced during the pandemic, Malaysia’s logistics warehousing sector has grown by leaps and bounds. The concern is whether there will be an oversupply of such facilities that the market cannot absorb. To help understand the situation better, City & Country spoke to property experts for an overview of the sector, insights into what developers should pay attention to and the sector’s outlook.
Savills Malaysia group managing director Datuk Paul Khong says: “Logistics and warehousing have been the ‘darling sector’ of the entire market, and demand for e-commerce … peaked during the Covid-19 pandemic in 2020 to 2022, which caused the rapid spike in the development of the industry.
“With the reopening of international borders on April 1, 2022, total cargo volumes in 2023 increased significantly, with total container throughput rising 3.5% year on year to 28.24 million TEUs (twenty-
foot equivalent units) in Malaysia, indicating strong growth.”
Savills Research data for Greater KL in 1H2024 shows that 55.3 million sq ft of warehousing or logistics space is available, especially in Klang and Shah Alam. These two locations take up 80% of market share with their strategic locations and proximity to the key transport hubs of Port Klang and Kuala Lumpur International Airport. Furthermore, there is an expected supply of 11.28 million sq ft coming into the market until 2027.
According to JLL Research, high-quality logistics spaces are located in three regions — the Klang Valley, Penang and Johor.
“At least 45 million sq ft of high-quality logistics space has been built so far in Malaysia. More than two-thirds of the total existing stock is located in the Klang Valley. Johor is the second largest market and Penang comes third,” says JLL Malaysia head of research and consultancy Yulia Nikulicheva.
“About 25 million sq ft of space is expected to be delivered [in the Klang Valley]. This represents a 40% increase in stock expected in Kuala Lumpur. We expect Johor and Penang’s share in new supply to remain stable around 30%.”
Knight Frank Malaysia executive director of land and industrial solutions Allan Sim concurs with his fellow experts and highlights how the use of the property differs from region to region.
“The majority of existing logistics warehouses in Penang and Johor are built for own occupation and end-users, whereas in the Klang Valley, they are developed more for rental or investment purposes,” he says.
According to Sim’s research, in 1H2024, the existing supply of logistics space in the Klang Valley was about 56.7 million sq ft, following the completion of two logistics warehouses in Bandar Bukit Raja Industrial Gateway.
“An additional 8.5 million sq ft of logistics space is expected to enter the market within the next two years, with about four million sq ft anticipated in 2H2024 and the balance of 4.5 million sq ft by 2025. In the pipeline are about 16.6 million sq ft of logistics space with projected completion between 2026 and 2028. This translates into an average of 5.5 million sq ft of incoming space annually,” says Sim.
Is there an oversupply?
With the expected increase in the supply of logistics warehouses, will there be an oversupply in the sector? The experts highlight some concerns but, overall, they seem optimistic that supply will be absorbed provided certain strategies are in place.
According to Savills’ Khong, “There are some slight concerns on oversupply, with 11.28 million sq ft of new warehouse space potentially increasing the current supply by 20%. Many of these new spaces are not leased yet; thus, absorption may take some time. In addition, businesses are moving towards larger, integrated warehouses by consolidating smaller spaces, driving demand for these solutions. This shift is likely to make new, high-quality warehouses perform better and stay appealing in the changing market.”
For JLL’s Nikulicheva, the issue of oversupply has to be looked at from two perspectives — market drivers and demand dynamics.
For market drivers, she highlights that the occupiers of logistics space in the Klang Valley are logistics and third-party logistics players (45.2%), followed by manufacturing (31.5%), retail (14.6%), e-commerce (6.2%), transport (2.1%) and information storage (0.4%). All of these occupiers are expected to see growth in their individual sectors, she says. As such, there will still be demand for logistics warehouses.
From demand dynamics, she says, data from JLL Research shows that new supply coming in 36 months is close to 25 million sq ft, which has raised concern of oversupply. A closer look shows, however, that the situation is not as dire as it may seem.
“Zooming into the coming supply at project level, we see that many projects scheduled for delivery in the coming 18 months have already secured a 50% occupancy rate prior to delivery,” Nikulicheva says.
“This trend has been persistent in the past two years. It demonstrates that the market is unsaturated. Vacancy rates are well below 5%, confirming that the logistics and industrial segment remains a landlord’s market.
“On the supply side, the market has been dominated by professional players experienced in delivering projects nationwide and internationally and, so far, they were not [observed to have made] bold decisions in their expansion strategy.”
Knight Frank’s Sim concurs, saying that the oversupply of logistics warehouses is not something to be concerned about, as there is strong leasing demand for Grade A warehouses and that trend looks set to continue. According to research data from Mordor Intelligence, he adds, the Malaysia freight and logistics market is expected to reach US$38.28 billion (RM165 billion) by 2030, which could result in an increase in demand for logistics warehouse space.
He says: “For projects that are ongoing and under construction, the pace of pre-lease activities may tend to be gradual or slower. The reason is that in Malaysia, end-users and occupiers often tend to wait until industrial projects are either near completion or fully completed before committing to pre-lease or lease agreements. This cautious approach is driven by a desire to ensure that the finished product meets specific needs, expectations and the timeline.
“Meanwhile, as the global supply chain adjusts to new global factors and recovery on industry sectors such as semiconductors, this would affect the supply and demand dynamics — providing a boost to demand for warehouse spaces in key regions such as Penang, Kedah, Melaka and Selangor. The rental performance of warehouse spaces will be subject, however, to investment activities, such as trends of foreign direct investment and domestic direct investment, in the coming year.
“As such, the logistics warehouse market is expected to remain stable and we do not foresee an oversupply, at least for the next two to three years.”
Managing expectations
With the logistics warehouse sector looking stable, how should developers manage their output of the product?
The first thing, Savills’ Khong suggests, is to lease out unsold stock so that the industrial park looks vibrant, and this could lead “to improved saleability and occupancy rates”. Moreover, it will help reduce holding costs such as property taxes and maintenance fees.
For products under construction, he says: “Developers should focus on securing pre-leasing agreements to ensure a steady income stream with their completion and thereby minimise vacancy risks and reduce speculative construction.”
For warehouses that have yet to be built, he advises: “Developers may consider built-to-suit options, which creates facilities tailored to specific tenant requirements with pre-agreed lease terms and at discounted rentals. This aims to reduce the risks associated with speculative development.”
Khong adds that sustainable construction practices are also crucial. “Adopt ESG (environmental, social and governance) elements, such as energy-efficient systems, renewable energy sources and green technologies including solar panels and cool roof systems, which aligns with modern sustainability standards and appeals to environment-conscious tenants.”
Nikulicheva says a logistics warehouse is easy to plan and build, taking a developer up to 25 months from planning to delivery. Still, she adds: “Even though market prospects are quite positive, developers should take a cautious view when developing larger-scale projects. Current headwinds in the global economy that anticipate a contraction of exports and reduction in global logistics volumes may have a negative impact on the Malaysian market.
“Even though in the coming two years, market balance is expected to be favourable for landlords, the overall market size is still quite vulnerable to larger volumes of supply delivered simultaneously and it may have a negative impact on vacancy rates and rent levels.”
Knight Frank’s Sim believes the products require maintenance if they are to stand the test of time. “Most industrial developers and real estate investment trusts specialising in logistics warehouses are experiencing near-full occupancy rates for their premises or assets. Despite the high occupancy rates, these stakeholders must continuously perform maintenance and occasional upgrades to ensure that their logistics premises or assets remain competitive with newer or upcoming buildings.
“We also observed that many outdated industrial assets were being phased out because they could not meet today’s demands. As such, developers or owners should consider undertaking a regeneration process to cater for newer requirements which are driven by automation and the ESG agenda.”
Planning ahead
To ensure that the products do not end up as white elephants, the property experts believe awareness of the latest trends and knowing what potential tenants are looking for are essential.
Sim highlights that sustainability and innovation are essential components to include in the construction of logistics warehouses, which will have several benefits.
“Occupiers are increasingly looking for warehouse spaces that align with their own sustainability goals. High-quality, or MNC (multinational corporation), tenants or occupiers are willing to pay a premium for warehouse spaces that meet this requirement,” he says.
This will logically lead to a reduction in operational costs when systems are energy-efficient and come from renewable sources in the form of energy-efficient lighting, insulation and solar panels.
Sim adds: “Developers should build warehouses with automation-readiness. As e-commerce and logistics continue to grow, the demand for automated solutions will increase. Designing warehouses with automation in mind ensures that they can scale up and adapt to future needs without requiring a major overhaul, which will eventually help the tenant or occupier to enhance efficiency and productivity, have better space utilisation and a more competitive advantage as well as improve safety, to name a few.”
On top of all this, there is also the issue of compliance. “Governments and regulatory bodies are implementing stricter environmental regulations and standards. Sustainable buildings often comply with these requirements more easily and, thus, they may also benefit from certain incentives.”
Nikulicheva’s advice follows the adage of “location, location, location”, but positioning logistics warehouses near major “thoroughfares linking seaports, airports and larger urban agglomerations” is essential.
Khong believes in offering practical and functional products. “Ensure that floors are durable and can support heavy equipment and stacking. Design large floor plates to enhance space efficiency and accommodate high product volumes. Include high ceilings to maximise vertical storage and support advanced automation systems. Implement the latest technologies and energy-efficient practices to boost efficiency and attract sustainability-focused tenants,” he says.
In terms of outlook, the property experts believe the sector still has legs.
Nikulicheva says: “As the macroeconomic drivers of the growth of logistics are expected to remain strong, we expect further market expansion in the medium term. A high level of space being pre-let before completion gives confidence to developers about their future investments. We anticipate continued rental growth in this segment, as new properties entering the market are often built with higher specifications.”
For his part, Sim says: “Despite some external challenges, the outlook for the logistics warehouse segment in Malaysia remains optimistic. The demand for prime logistics warehouses in key locations or regions such as the Klang Valley, Johor Bahru and Penang will remain stable, with moderate rent increases anticipated.
Khong adds: “Value-added services such as security, asset management and facilities management have become an expected norm and custom-built warehousing or built-to-suit models, particularly in smart logistics, are becoming popular.
“Overall, the logistics warehouse sector is set to continue its pace of growth with these trends and technological improvements.”
Source: The Edge Malaysia
