Industrial Trends
WHY THE INDUSTRIAL MARKET CONTINUES TO BE A BRIGHT SPOT
By David Hall - National Director, Head of Industrial and Logistics, ANZ: Cushman & Wakefield
Demand is already outstripping supply for industrial and logistics property in a trend that’s not showing any signs of slowing.
The Australian industrial and logistics property market continues to experience outsized demand from occupiers and investors, supported by several persistent tailwinds. For one, ecommerce activity remains elevated while automation adoption rises, and lessons from recent global supply chain disruptions have meant occupiers are carrying more stock locally. Meanwhile, demographic shifts, most notably population growth, are expected to underpin ongoing consumer demand for goods. Despite forecasts for moderating economic growth amid higher inflation and interest rates, Australia is expected to outperform many global peers. Together, these factors support the prevailing view that industrial market fundamentals are, and will remain, positive. After all, near-record low vacancy rates, a trend towards multi- level warehouses and robust land absorption across many national industrial markets indicate that demand is running well ahead of supply. For developers, these trends present both an opportunity and a challenge. On the one hand, occupier demand is not expected to abate. On the other, land supply is exceptionally tight and hotly contested. With the market closely watched, we explore the latest movements among tenants and investors and provide a view of the industrial market outlook. Tenant demand reflects a tight market Since 2020, industrial leasing activity has grown significantly, led by the transport, logistics, and retail trade sectors. In 2023, that has remained strong, with more than 2.2 million square metres of space leased so far. At this point, the only thing holding back higher volumes is a lack of space.
vacancy rate sharply once they are finalised. As tenants compete for limited leasing options, rental growth has increased at its fastest pace on record. Nationally, prime rents have jumped by almost 30% over the past 12 months, around eight times the long-term annual average. Given this, a large share of warehouses nationally are now considered to be rented at below-market rates and, in some cases, by a significant margin. As leases expire and new tenants come in, a positive rental reversion is expected to align these properties with the rest of the market. Looking ahead, vacancy rates are expected to remain well below historical levels. Over the next 12 months, there is the potential for 1.4 million square metres of speculative space to come online, led by the Sydney and Melbourne markets. That could put upward pressure on vacancies in Australia’s two largest markets. However, current enquiry across the East Coast market in the order of 2.3 million sqm suggests that new space will be quickly absorbed but indicates the prospect that rents can go higher. A destination for local and global capital Given the dynamics of the industrial and logistics property market, record levels of capital seeking entry and exposure have been experienced. Australia’s competitive global economic position and the expected favourable outlook continue to attract global investors. This was evidenced in the ANREV Investment Intentions Survey 2023, showing that Sydney and Melbourne are the preferred investment markets for capital targeting the Asia Pacific region in 2023. While higher debt costs have impacted industrial and logistics yields since mid-2022, leading to pricing uncertainty for investors, greater certainty around the interest rates outlook will provide clarity. We believe that will encourage investors who have sat on the sidelines over the past 18 months to re-enter the market. At the same time, unparalleled income growth has largely maintained asset pricing for the sector. Investment volumes for transactions above $5 million in value reached $8.6 billion in 2022, underpinned by demand for short WALE infill sites as investors chased repositioning opportunities to maximise rental reversion. For 2023, almost $3.8 billion in industrial assets has traded so far for the year. Adding to that will be the significant volume of assets either in due diligence or on the market, and once they transact, investment volumes for the year are likely to be substantially boosted. Looking at the leasing and investment trends across Australia’s industrial market indicates unflinching demand even as the economic cycle has turned. These are long-term structural drivers that, amid a lack of space and land, will continue to push the boundaries of industrial precincts further out and vertically upwards and support the next wave of development activity and beyond.
Gross Industrial and Logistics Take-up by Capital City (>3,000 sqm)
Source: Cushman & Wakefield Research
Vacancy rates have dropped sharply in recent years, which across the East Coast sits at an average of 0.8% for industrial properties of more than 3,000 square metres. Sydney remains the tightest Australian market with a 0.2% vacancy, while Melbourne is close to historical lows at 0.8%. In contrast, Brisbane has recorded a modest rise in vacancies to 2.1%, as speculative developments have been completed and more existing space has added to market supply. However, around half of this is under ‘Heads of Agreement’, which will cut the
16 – October / November 2023
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