Non-residential construction sector seen to slow down starting this year

The large supply of commercial and industrial space could hamper investment on new projects.

Following several years of robust activity in the non-residential building sector, a slowdown starting this year could likely happen, BMI Research said in a report.

The slowdown will be a result of poor demand and a large existing supply of commercial and industrial space that could hamper investment in new real estate projects.

Employment in the manufacturing sector fell for the 10th consecutive quarter in Q1. BMI's Country Risk teams expects to slide down further until 2026.

Industry-wide trends of automation and making smaller products could also worsen the oversupply in the country's commercial and industrial real estate.

This was indicated in the latest vacancy rates in 2017, which are above 11% for offices and above 8% for retail areas.

"This weakened demand, coupled with the completion of several high-profile industrial and commercial construction projects, will see activity in the city-state lag its Southeast Asian peers," BMI Group said.

The group also said annual expansion should fall into an average of 4.7% in real terms from 2017 to 2026, lower than 8.9% from 2007 to 2016.

Here’s more from BMI Research:

The need for new industrial space will continue to weaken - it rose to 11.3% in Q217, the highest since 2005 - as the performance of the traditional manufacturing wanes and completed projects are more than sufficient in catering to the current demand. We note structural changes in the manufacturing sector, such as the greater automation and miniaturisation of production lines, mean older industrial spaces are poorly suited for newer industrial processes. As the gap widens between supply and demand - indeed, nearly SGD1.9bn (USD14.0bn) worth of industrial construction contracts were signed throughout May 2017 - developers and operators of newly completed and upcoming projects will struggle to meet occupancy targets, while projects in earlier developmental stages could be cancelled or postponed.

High vacancy rates in the retail real estate segment will also hold back investment in new developments. The percentage of vacant retail space hit 8.1% in Q217, the highest since the start of the dataset in 2011. This comes in line with the global shift towards e-commerce platforms in favour of the development of the traditional retail sector, with a key example of this trend the launch of Amazon in Singapore in July (see 'Alibaba Targeting Dominance Of SEA e-Commerce Market', April 13 2016). Our proprietary Key Projects Database reflects this trend taking hold in Singapore, with the majority of projects logged in commercial construction brownfield rather than greenfield developments.