Your bi-annual look at the industrial market performance 1ST HALF 2023 MARKET MONITOR INDUSTRIAL
CONTENTS Industrial Occupier Demand Runs Strong 2 Sydney 3 Melbourne 9 Brisbane 13 Adelaide 18 Perth 22 Canberra 26 Darwin 30 Hobart 33 LJ Hooker Commercial Offices 35 30-40 Alfred Road, Chipping Norton NSW 2170
2 Industrial Occupier Demand Runs Strong Occupier demand for industrial property was robust last year across the eastern seaboard capital city markets, with net absorption running well above long run averages. While, actual take-up in Perth and Adelaide was constrained by very low vacancies. In most markets, demand through 2022 was buoyed by the tail end of the COVID rebound in the state and territory economies and pandemic related factors. Now all markets face a situation where the take-up of space is being constrained to varying degrees by low vacancies amongst existing buildings and delays to new supply. In turn, rents in most centres rose at a brisk pace for at least part of last year. Cost pressures flowing through from higher land values and construction cost are pushing up pre-lease rents adding further upward pressure to market rents. In the investment market, yields remained firm over the 2022 financial year, but appear to have softened across most areas during the second half of 2022 in response to higher bond rates, although there is little sales evidence to support the shift. Even so, rental growth helped push capital values higher or at least offset softening yields across all the major markets last year. Occupier demand for industrial property across the eastern seaboard markets, Adelaide and Perth to remain solid over the next 6 to 12 months before pandemic related drivers dissipate. Growth in online spending has already slowed nationally and is likely to slow further as people balance spending on goods back to services. Further, we do not think industrial property occupiers’ propensity to carry additional storage space for higher inventory levels will persist long term. Over the medium to longer term, the connection between industrial property demand and economic growth will be re-established (with economic growth facing headwinds as interest rates rise and consumer spending tapers). On the supply side, based on projects under construction and approvals, completions in Sydney, Melbourne, Brisbane, Perth and Hobart to register historically high levels over the next year or two, but fall back (or remain below average) in Adelaide, Canberra and Darwin. But, given project lead times, vacancy rates are expected to remain low in most centres near term before drifting higher as supply takes time to adjust to normalised demand. All states and Territories face near term headwinds to economic growth as rising interest rates slow economic activity, pointing to moderating industrial property demand from this source. Near term rental growth prospects are positive to strongly positive across all markets, except Darwin (which faces slow absorption of excess supply), reflecting low vacancies but also rising costs flowing through from the pre-lease market, that were previously absorbed using firming yields. The duration of strong rental growth depends, market by market, how long rising construction levels take to surpass slowing occupier demand and push vacancies higher. Thereafter, rental growth should slow as vacancy rates rise. Industrial property yields across the markets to soften further to the end of this year, responding to elevated bond rates. But yield softening will be moderated by rental growth, now key to maintaining values. Overall, prospects for industrial property still compare well against other asset classes. Mathew Tiller Head of Research, LJ Hooker Group Industrial Market Monitor | 1st Half 2023
Sydney Industrial Market Sydney prime industrial market indicators South North Central West Outer Net face rent ($ sqm) 302 252 191 181 Incentive (%) 5 10 7 7 Yield (%) 4.0 4.3 4.1 4.1 Capital value ($ sqm) 7,633 5,806 4,705 4,467 3 Occupier demand for industrial property across Sydney remained strong in 2022, after reaching record levels in 2021. That said, net take up last year was constrained by an acute shortage of available space. Gross take-up was between 850,000 to 900,000 square metres over last year and net absorption reached 860,000 square metres during the 2022 financial year (in buildings > 5,000 square metres) and tracked lower to around 600,000 square metres for calendar year 2022, but both still well above the long run average. Enquiry has been strong across the South, South West, Outer West, North, North West and the Inner West. Overall, businesses are needing to make quick decisions when they come to the market looking for space because of the lack of available options. Demand is coming from a broad range of sectors as businesses invest in supply chains. However, the most active groups in the market looking for space last year were transport and logistics (including those servicing on-line retailers) and manufacturers. Even though the value of online retail spending nationally peaked around the start of 2022 and has fallen back, it is still at historically high levels and e-commerce operators are a notable source of demand, but not across all the regions. We surmise that many businesses have recently stopped taking extra space to stockpile inventory as supply chain disruptions start to ease and concerns about the economic outlook mount. This has reduced expansion space demand from this source. However, surveys suggest that a substantial proportion of wholesalers, retailers, building suppliers and manufacturers still see the potential for supply chain disruption as a significant issue. Demand for space is stronger from tenants than owner occupiers, the latter constrained by an acute shortage of available options and an increasingly challenging funding environment as interest rate rise. Robust net absorption continues to outstrip completions, reducing vacancy rates across the metropolitan area. At June last year, the total vacancy rate was extremely tight at 0.3% (in buildings >5,000 square metres) marking the lowest vacancy rate on record. The total vacancy rate ended 2022 just as tight. Vacancies amongst all the regions are very tight with limited options available across the size spectrum for those looking for space. The combination of strong demand and very low vacancies underpinned a sharp increase in prime net stated rents in 2022. Prime grade rents saw an average growth of 34% in the Outer West, 28% in South Sydney, 19% in the Central West and 15% in the North. Secondary rental growth in the South and Central West was just as impressive at 26% and 22% respectively. Recent movements in incentives in Sydney reflects how low vacancy rates are across the regions. Overall leasing incentives amongst existing buildings fell further last year with average prime leasing incentives ending 2022 at 5% in the South, 7% in the Central West and Outer West, and 10% in the North. Leasing market Industrial Market Monitor | 1st Half 2023
1,000 1,800 2,600 3,400 4,200 5,000 5,800 100 120 140 160 180 200 220 240 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 $/psm $/psm Values (Right axis) Net stated rents (Left axis) Forecast 4 Occupier demand for industrial property in Sydney is expected to remain strong over the next 6 to 12 months, before pandemic related drivers dissipate. Besides these drivers, the outlook for industrial demand will also be influenced by economic growth nationally and in New South Wales, both of which are facing near term headwinds as interest rates rise and consumer spending tapers. Demand for industrial space will continue to be influenced by the structural shift to servicing e-commerce. However, the extraordinary pace of growth that was heightened by the pandemic has already slowed and is likely to slow further as people balance spending on goods back towards services. Food retail spending has settled since the pandemic boosted spikes in 2020 but remains an important demand driver. Going forward, growth in this sector to more closely mirror population growth. Furthermore, we do not think that industrial property occupiers’ propensity to carry additional storage space for higher inventory levels will persist long term. Our assessment is that supply chain disruptions are likely to linger this year but then should normalise. Beyond this point, the costs associated with carrying extra storage space will trigger a rationalisation, but not to the point of returning to pre-COVID operating methods. Lastly, a pick-up in completions expected from the first half of 2023 should allow for a release of pent-up demand that has been constrained by extremely low vacancies amongst existing buildings. Near term rental growth forecasts have been revised up significantly, due to low vacancy rates and rising pressures flowing from pre-lease rents. Annual growth rates of 19% to 35% for prime net stated rents are expected across the regions in the 2023 financial year and 10% to 12% in the 2024 financial year. Low vacancies in secondary markets are supportive of 20% per annum growth rates in the 2023 financial year and 9% to 11% in the 2024 financial. Rises in long bond rates over the last 12 months have flowed through to softer property yields, removing a key suppresser of pre-lease rents (and in turn market rents). Higher land values, construction costs and a forecast phase of yield softening all point to higher rents needed for pre-leases. The outlook for leasing incentives is heavily influenced by forecast movements in vacancy rates. Over the next six to 12 months, we forecast incentives across the regions to tighten slightly, reflecting very tight market conditions before softening through the middle of the decade as vacancy rates rise. Leasing outlook Sydney Outer Western region industrial rents and capital values Industrial Market Monitor | 1st Half 2023 1,000 1,800 2,600 3,400 4,200 5,000 5,800 100 120 140 160 180 200 220 240 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 $/psm $/psm Values (Right axis) Net stated rents (Left axis) Forecast
5 The Sydney industrial property investment market held firm in terms of sales value over the year to September 2022, at over $4 billion, but indicators suggested a slowing in activity during Q4 2022. It is clear that rising interest (long bond) rates last year caused investors some pause. Even so, recent surveys point to industrial property investments remaining popular, but investors are being more selective, targeting opportunities that can capture rising market rents to offset the effect of softening yields. Furthermore, Sydney industrial property still seems to be viewed favourably by foreign investors, with a notable proportion of sales over the last year attributable to this buyer cohort. Major recent sales included; • Gateway Capital/Invesco buying 12 Frederick Street, St Leonards for $118 million; • Pittwater Industrial paid $95m for a portfolio of three Sydney industrial properties on a yield of 3.2%; and • Nash Cap bought the Rosehill Business Park for around $118 million. Overall, Sydney prime yields were firm at an average of 3.6% to 3.9% as at June 2022. While South and Central West secondary yields ranged from 4.2% to 4.3% at that time. However, these tight yields came under pressure to rise during the second half of 2022, as higher bond rates ratcheted up investor’s cost of debt. By December 2022, prime yields softened by 40basis points to an average 4.0% to 4.3% with South and Central West secondary yields at 4.6% to 4.7%. The strength of rental growth last year more than offset yield softening, driving solid to strong capital value growth of 6% to 23% across the regions, albeit well down on the exceptional growth of 2021. Secondary capital value growth in the Central West and South was also strong last year at 10% and 16% respectively. Investment market Since 2020, 10-year bond rates have increased by circa 250 basis points, narrowing the spread to prime Sydney industrial property yields to well below the long run average. On our forecasts, prime yields in the benchmark Outer West will soften by a further 60 basis points this year, for a total increase of 100 basis points. Our forecasts reflect our 10-year bond rate projections hovering at or above the current rate (3.4%) over the next two years. However, strong rental growth will limit how much yields often. investor preference for prime assets will see secondary South/Central West yields soften by 130 basis points by the end of 2023. The combination of rent and yield forecasts will see a slowdown in the extraordinary rate of capital value growth. Prime values in the Southern, Northern, Central Western and Outer Western regions are forecast to rise by 6% to 12% over the two and a half years to June 2025. Secondary prices in the Southern and Central Western regions are forecast to rise by just circa 3% over the same period. Investment outlook 185 George Downes Drive, Central Mangrove NSW 2250 Industrial Market Monitor | 1st Half 2023
New industrial property completions across the Sydney metro area for 2022 was approximately 580,000 square metres across 29 projects (> 5,000 square metres in size) a volume just above the long run average. Delays due to weather, material and labour disruptions notably reduced the volume of completions a year earlier. The Outer West accounted for most completions last year, followed by the Central West. Most developments were underpinned by precommitment, however, a proportion commenced on a speculative basis but have since been leased. Supply 6 Amongst the largest recent completions included • A 66,000 square metres building for Coles at the Oakdale Industrial Estate – West in Eastern Creek; • The 43,600 square metres Warehouse 4 development on Astoria St at Sydney Business Park in Marsden Park, committed to by TJX; and • A 41,832 square metres warehouse at 149 McCredie St in Smithfield. 2/14 Enterprise Close, West Gosford NSW 2250 Industrial Market Monitor | 1st Half 2023
0 100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 -8 -6 -4 -2 0 2 4 6 8 10 12 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 % annual change Source: ABS State final demand (left axis) Completions (right axis) '000 sq m Forecast Based on projects underway, approvals data and a sustained period of low vacancies pushing up rents, completions to reach a record high of 1 million square metres this year, staying high at 900,000 square metres in 2024. We already know of about 50 projects that are proceeding or likely to proceed for a combined 1.54 million square metres and are confident more will emerge. Notable developments include: • The 76,000 square metres Woolworths Distribution Centre at 250 Victoria Street, Wetherill Park, due to complete in 2023; • A 73,290 square metres TTI building at 649-763 Mamre Road, within the Yards at Kemps Creek, also due for completion in 2023; and • 66,610 square metres at 804-882 Mamre Road, Kemps Creek due to complete in 2024 Material shortages and construction cost pressures are likely to continue for the next one to two years, delaying some projects. In time, these pressures should ease as supply chain disruptions normalise. Meanwhile, rapidly rising market rents are keeping pace with rents required for new builds, promoting competition amongst major developers for large pre-leases. The recent mix of pre-lease and speculative building to continue as developers look to capture both longer and shorter turnaround needs. Supply outlook Sydney demand and new supply 7 58 Harley Cres, Condell Park NSW 2200 Industrial Market Monitor | 1st Half 2023
8 Industrial Market Monitor | 1st Half 2023 7138 The Bucketts Way, Taree South NSW 2430
MELBOURNE Melbourne prime industrial market indicators South-East North West City Fringe Net face rent ($ sqm) 123 103 108 204 Incentive (%) 13 16 16 8 Yield (%) 4.25 4.25 4.25 4.15 Capital value ($ sqm) 2,894 2,424 2,541 4,916 9 Occupier demand for industrial property across Melbourne has maintained a very brisk pace in recent times. Metro-wide gross take-up figures was around 1.6 million square metres over the year to September 2022. Net absorption reached 1.16 million square metres (buildings > 5,000 square metres) during the 2022 financial year and tracked to around 1 million square metres for calendar year 2022, both more than two times the long run average. Indeed, enquiry has been strong across the North, West and South-East, but is easing in the City Fringe. Overall, businesses need to make quick decisions when they come to the market looking for space because of the lack of available options. Demand is coming from a broad range of sectors as businesses invest in supply chains. However, the most active groups in the market looking for space last year were transport and logistics, retailers (including e-commerce) and manufacturers. Even though the value of online retail spending nationally peaked around the start of last year and has fallen back, it is still at historically high levels with limited pull back in occupier demand so far from e-commerce operators or those who service them. Demand for space is strong from both owner occupiers and tenants, but there is an acute shortage of options for owner occupiers to buy. Even so, very low vacancies across the regions are acting to constrain occupier demand from both sources. Strong net absorption outstripped above average completions during the 2022 financial year, continuing the rapid reduction in the vacancy rate across the metropolitan area. At June 2022, the total vacancy rate fell to 1.2% (in buildings >5,000 square metres) marking the lowest vacancy rate on record. The total vacancy rate ended last year just above 1.0%. Vacancies amongst all the regions are tight, particularly in the West and City Fringe, but there are limited options available metro-wide for those seeking larger buildings. The combination of strong demand and very low vacancies underpinned a sharp increase in prime net stated rents in 2022. Net stated prime rents rose 21% to an average $123 per square metre in 2022 in the South-East, 22% to $108 per square metre in the West and 23% in the City Fringe to $204 per square metre. Rents in the North were slightly lower than those in the West. The growth pattern in secondary rents in the South-East reflected low vacancies in the region, increasing by around 17% over 2022 to $96 per square metre. Rising costs mean there is not much difference between pre-lease rentals and rents on existing buildings or spec-builds, which are all climbing higher. Rising land prices and construction costs are flowing through to higher pre-commitment rents, in turn pushing up market rents. Recent movements in incentives in Melbourne reflects how low vacancy rates are across the regions. In the South-East, prime incentives fell sharply in the first half of 2022 to an average of 15%, tracking towards 13% by December 2022. In the West, incentives finished the 2022 financial year at an average 20% but are now closer to 16%. In the City Fringe, average incentives are lower, moving from about 9% in June to 8% now. Secondary incentives in the South-East were already much lower than prime at an average 10% at June and have changed little since. Leasing market Industrial Market Monitor | 1st Half 2023
10 Occupier demand for industrial property in Melbourne is expected to remain strong over the next 6 to 12 months, before pandemic related drivers dissipate. Besides these drivers, the outlook for industrial demand will also be influenced by economic growth nationally and in Victoria, both of which are facing near term headwinds as interest rates rise and consumer spending tapers. Demand for industrial space will continue to be influenced by the structural shift to servicing e-commerce. However, the extraordinary pace of growth that was heightened by the pandemic has already slowed and is likely to slow further as people balance spending on goods back towards services. Food retail spending has settled since the pandemic boosted spikes in 2020 and early 2022 but remains an important demand driver. Going forward, growth in this sector to more closely mirror population growth. Furthermore, we do not think that industrial property occupiers’ propensity to carry additional storage space for higher inventory levels will persist long term. Our assessment is that supply chain disruptions are likely to linger for a little while yet but then should normalise. Beyond this point, the costs associated with carrying extra storage space will trigger a rationalisation, but not to the point of returning to pre-COVID operating methods. The pattern of the drivers outlined above suggest the take-up of industrial property over the first half of 2023 will remain robust. We forecast net absorption of 810,000 square metres for the 2023 financial year, before falling back to around 600,000 square metres in the 2024 financial year. Given a strong profile for demand, low vacancy rates and rising pre-lease rents, that prime rents will grow circa 15% to 27% pa across the regions in the 2023 and 2024 financial years. Low vacancies in secondary market are supportive of c 20% pa growth rates across the same period. Rises in long bond rates last year means property yields are showing signs of softening, removing a key suppresser of pre-lease rents (and in turn market rents). Higher land values, construction costs and a forecast phase of yield softening all point to higher rents needed for pre-leases. Leasing outlook Melbourne South-East region industrial rents and capital values 600 1,000 1,400 1,800 2,200 2,600 3,000 3,400 3,800 70 80 90 100 110 120 130 140 150 160 170 180 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 $/psm $/psm Forecast Values (Right axis) Net stated rents (Left axis) Industrial Market Monitor | 1st Half 2023
11 The Melbourne industrial property investment market slowed over the year to September 2022, with the value of sales falling a reported 40% to around $3 billion, but this was from a very high base. It is clear that rising interest (long bond) rates last year have caused investors to pause. Even so, recent surveys point to industrial property investments remaining popular, but investors are being more selective, targeting opportunities that can capture rising market rents to offset the effect of softening yields. Furthermore, Melbourne industrial property still seems to be viewed favourably by foreign investors, with a notable proportion of sales over the last year attributable to this buyer cohort. Major recent sales included: Major recent sales included; • Frasers Group purchasing three new warehouses on Magnesium Place Truganina for $61 million, on a yield of 3.7%; • Frasers also paid $41 million for a 21,000 sqm building at 2-24 Douglas Street, Port Melbourne; • Charter Hall paid $84 million for a 28,000 sqm building in Mulgrave with development potential on a passing yield of 3.1%. Overall, we assess Melbourne prime yields remained firm at an average of 3.8% to 4.0% across the South-East, North, West and City Fringe at June 2022, and 5.0% for South-East secondary. We surmise that yields for Melbourne industrial properties came under pressure to rise during the second half of 2022, as higher bond rates ratchet up investor’s cost of debt. However, there is little evidence to date to confirm the shift. At December 2022, prime yields averaged 4.15% to 4.25% across the regions, with South East secondary around 5.3%, reflecting a softening of 40 basis points. The combination of rising rents and softening yields still underpinned robust capital value gains for calendar 2022, averaging 10% to 13% across the regions and 9% for South East secondary. However, the pace of growth was significantly slower than through the 2022 financial year. Over the last two years, 10-year bond rates have increased by 250 basis points, narrowing the spread to prime Melbourne industrial property yields to well below the long run average. On our forecasts, prime yields in the benchmark SouthEast will soften by 60 basis points by the end of this year, for a total softening of 100 basis points. Our forecasts reflect our expectations that 10-year bond rate will hover at or above the current rate (3.4%) until the end of 2024. The rise in bond rates over recent years suggest that Melbourne industrial property yields should soften more, however, we believe that strong rental growth will limit how much yields often. By the end of 2023, we forecast average prime yields will rise to 4.8% to 4.9% across the regions, before stabilising. Yields on secondary properties are forecast to take their lead from prime for timing/direction, but with a greater softening (130 basis points) over the next 12 months. The combination of rent and yield forecasts will see a further slowdown in the extraordinary rate of capital value growth over recent years. Prime values in the South-East, West and City Fringe are forecast to rise by 13% to 20% over the two and a half years to June 2025. Secondary prices in the South-East are forecast to rise by 11% over the same period. Investment market Investment outlook Industrial Market Monitor | 1st Half 2023
200 300 400 500 600 700 800 900 1,000 1,100 1,200 1,300 1,400 -6 -4 -2 0 2 4 6 8 10 12 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 % annaul change Source: ABS State final demand (left axis) Completions (right axis) Forecast '000 sq m An above average 970,000 square metres of new supply was completed across the Melbourne metro area last year, across 48 projects (> 5,000 square metres in size). The largest examples included vidaXL, Mainfreight, Myer, Mitre 10/Nike, and Early Settler. The West accounted for over half the number and volume of completions, followed by the South-East at more than one third. The volume of completions represented a step down from 2021 but is still high in an historical context. A substantial proportion of developments completed last year were underpinned by tenant pre-commitment. However, around 25% (by volume and number) commenced on a speculative basis. Major developers including GPT, Frasers, Charter Hall, Pellicano and Stockland rolled out speculative developments and overall were successful in securing tenants before completion. Supply 12 Based on projects underway, approvals data and a sustained period of low vacancies pushing up rents, completions to remain historically high at around 900,000 square metres per annum until the end of 2024. We already know of 26 projects that are proceeding for a combined 700,000 square metres and are confident more will emerge. Notable examples include: • 46,000 square metres at 11-167 Pam Spring Road in Ravenhall for Nike/Lululemon due for completion in 2023; • 40,000 sq- m at Portlink Logistics Estate in Altona North, also due in 2023; and • 74,200 square metres at the Melbourne Airport Business Park in Tullamarine for Techtronic Industries, due to complete in 2024. The recent mix of pre-lease and spec building to continue as the developers look to capture both longer and shorter turnaround needs. By THE 2025 FINAINCIAL YEAR, we forecast industrial property completions to gradually fall back closer to the long run average of about 700,000 square metres per annum, crimped by moderating demand and moderately higher vacancies. Supply outlook Melbourne demand and new supply Industrial Market Monitor | 1st Half 2023 % annual change
BRISBANE Brisbane prime industrial market indicators South North Trade Coast Yatala Net face rent ($ sqm) 133 140 150 120 Incentive (%) 13 11 12 14 Yield (%) 4.7 4.7 4.6 4.8 Capital value ($ sqm) 2,830 2,978 3,261 2,500 Occupier demand for industrial property across Brisbane was strong last year with gross take-up exceeding 900,000 square metres. Net absorption reached around 710,000 square metres during 2022, which is around two-to-three times the long run average. Enquiry has been very strong across the South, South East, South West, North and the Trade Coast. Certainly, rising interest rates are pushing some would be owner occupiers into the tenant pool as is the limited options for owner occupiers to purchase. Demand is coming from a broad range of sectors as businesses invest in supply chains. However, the most active groups in the market looking for space during 2022 were transport and logistics, retailers/wholesalers (including e-commerce) and manufacturers. Many businesses are now holding higher inventory levels to guard against supply chain disruptions and would like to take additional storage space if it were available. The strength of net absorption last year easily outpaced rising new completions, firstly lowering the metropolitan vacancy rate to 1.6% at June and then under 1.0% by December 2022, the lowest vacancy since the tail end of the last resources boom 10 years ago. Vacancy rates are extremely low in the Trade Coast and North regions and are so low that they are constraining net absorption across the metropolitan area as a whole. Reflecting the rapid market tightening over the last 12 months, net stated prime rents rose strongly across the regions to sit between, an average of, $120 per square metre at Yatala up to $150 per square metre on the Trade Coast at December 2022, an increase of 13% to 18%. Average prime incentives started to fall notably during 2022, ranging from 11% in the Northern region to 14% in Yatala. Incentives on pre-lease deals can be higher, depending on the developer. Average secondary stated rents demonstrated strong growth as well last year. Leasing market 13 109 Waverley Road, Camp Hill QLD 4152 Industrial Market Monitor | 1st Half 2023
1,000 1,500 2,000 2,500 3,000 3,500 4,000 90 100 110 120 130 140 150 160 170 180 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 $/psm $/psm Values (Right axis) Net stated rents (Left axis) Forecast Demand for industrial property in Brisbane is expected to be influenced by economic growth in Queensland, particularly State Final Demand (SFD), but also drivers that were accelerated by the pandemic, which will start to dissipate. Key economic drivers come from rising interstate migration (and associated demand for goods), improving tourism and positive prospects for mining investment. Travel flows are continuing to normalise, and Queensland is set to be a major beneficiary of this with tourism exports picking up. Besides SFD, demand for industrial space will continue to be supported by the structural shift to servicing e-commerce. However, the extraordinary pace of growth that was heightened by pandemic related restrictions has already slowed and is likely to slow further as people balance spending on goods back towards services. Food retail spending has settled since the pandemic boosted spike in 2021 but remains an important demand driver. Going forward, growth in this sector will mirror population growth more closely. Furthermore, industrial property occupiers’ propensity to carry additional storage space for higher inventory levels will persist long term. Supply chain disruptions are likely to linger for a while this year but then should normalise. Beyond this point, the costs associated with extra storage space will trigger a rationalisation, but not back to pre-pandemic levels. The pattern of the drivers outlined above suggest the take-up of industrial property over the next 12 months will remain robust. Net absorption is expected to remain at or above 580,000 square metres per annum until the end of this year, before falling back to around 460,000 square metres towards the middle of the decade, as pandemic related drivers dissipate. Vacancy rates will remain around current low rates for another 12 months, before rising to 2025 as an increasing supply response outpaces normalising demand. The outlook for prime stated rents is for strong growth to be sustained over the next two years, at around 14% per annum across the regions before slowing in the 2025 financial year. We anticipate rising rents will be underpinned by tight market conditions and rising pre-lease rents (driven by higher land values and construction costs impacting feasibilities) filtering through to market rents. Leasing outlook 14 Southern Brisbane industrial rents and capital values Industrial Market Monitor | 1st Half 2023
15 The Brisbane industrial investment market slowed last year with circa $1.5 billion of deals reported, after a very strong 2021 (when more than $2.5 billion transacted). Last year, a lack of stock offered for sale and investors pulling back as interest rates rose, hampered deals. Major recent sales of Brisbane assets included: • Morgan Stanley buying a 26,000 square metres building at 1 Ashburn Road, Bundamba for $53 million; • Frasers selling buildings on Arthur Dixon Court, Yatala for almost $48 million; and • Dexus selling a 12,100 square metres building at 112 Cullen Avenue, Eagle Farm to an undisclosed buyer for close to $32 million. Overall, the weight of money chasing industrial property in Brisbane pushed yields down to historical lows mid last year. At June 2022, average prime yields stood between 4.2% and 4.3% across the Trade Coast, South, and North. Yields on secondary assets sat between 5.3% and 5.4% across the three major industrial regions. Since then, a gap has emerged between buyer and seller expectations as the cost of debt rose. Indicators suggest that prime industrial property yields in Brisbane softened during the second half of 2022 along with the other eastern seaboard markets, but there has been limited sales to confirm the shift. We estimate there was a 40 basis point softening, lifting average yields up to 4.6% to 4.8% across the regions at December 2022. Reflecting the combination of strong stated rental growth and softening yields, average prime capital values grew by 6% to 12% during 2022, but prices stalled or fell slightly during the second half of the year. In line with the Sydney and Melbourne markets, yields for Brisbane industrial properties will come under more pressure to soften this year as higher bond rates flow through fully to investor’s cost of debt. Since 2020, 10-year bond rates have increased by 250 basis points, narrowing the spread to prime Brisbane industrial property yields to well below the long run average. It’s expected investors will factor in higher yields in offers, but owners are unlikely to sell unless they have too, leading to lower investment market activity. Even so, recent investor intention surveys suggest industrial property will remain a sought after investment class due to rising rents. Overall, Brisbane will follow Sydney and Melbourne, with a circa 60 basis points softening in prime yields this year before stabilising, pushing the benchmark South up to 5.3%. When combined with strongly growing rents, this suggests prime capital values growth will slow this year before returning to moderate gains towards the middle of the decade. Investment market Investment outlook 9 Holt Drive, Torrington, QLD, 4350 Industrial Market Monitor | 1st Half 2023
0 100 200 300 400 500 600 700 800 -4 -2 0 2 4 6 8 10 12 14 16 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 % annual change Source: ABS State final demand (Left axis) Completions (right axis) '000 sq m Forecast 16 An above average 500,000 square metres of new supply was completed across the Brisbane metropolitan area during 2022, across circa 39 projects (> 3,000 square metres in size). Of the projects completed over the last year, the Southern and Western Corridors continued to dominate activity. The volume of completions represented a substantial step up from the 320,000 square metres completed in 2021. Most of the developments completed in 2022 were underpinned by tenant pre-commitment. However, a notable proportion commenced on a speculative basis. Major developers including GPT, Goodman, and ESR rolled out speculative developments and low vacancy rates ensured they were successful in securing tenants. Based on projects under construction and approvals data, around 650,000 square metres of new builds are due for completion metro wide by the end of 2023 and 2024 is expected to be another very strong year for supply, surpassing this mark. Activity will be supported by large pre-committed spaces including Coles (circa 66,000 square metres at Redbank), Winning Appliance (circa 46,000 square metres at Wacol), Bapcor Limited (45,000 square metres at Redbank), a 36,000 square metres facility committed to CEVA at Berrinba and a 23,000 square metres warehouse for Burndy Cable Support at Acacia Ridge. As elsewhere, there is the potential for project completions to slip due to capacity constraints across the construction industry. Approvals data over the year to November 2022 showed circa $1.92b of industrial projects was approved, heavily skewed towards warehouses. This represents a 37% increase on the figure for the previous year. Around 27% of warehouse approvals over the 12 months to November 2022 are in Ipswich, with 69% captured in the greater Brisbane area. A mixture of pre-leases and spec construction is expected to continue as the major developers look to capture requirements with both longer and shorter turnaround times. Without servicing/ rezoning delays, there is plenty of planned industrial land to meet our supply forecasts. Supply Supply outlook Brisbane demand and new supply 5-7 Thorsborne Street, Beenleigh QLD 4207 Industrial Market Monitor | 1st Half 2023
17 Industrial Market Monitor | 1st Half 2023 132 Lutwyche Road, Windsor QLD 4030
ADELAIDE INDUSTRIAL MARKET Adelaide prime industrial market indicators Inner West Inner North Outer North Inner South Outer South Net face rent ($ sqm) 130 113 100 115 90 Incentive (%) 7.5 7.5 9.0 7.5 11.0 Yield (%) 5.0 5.3 6.0 5.3 6.8 Capital value ($ sqm) 2,600 2,132 1,666 2,170 1,323 South Australia was relatively sheltered from economic impacts derived from the pandemic and experienced a solid recovery over the last couple of years. A change in South Australia’s state government last year has resulted in an increased focus on health spending, providing a positive boost for public demand growth. Adelaide based defence programs are and will be significant contributors to medium term growth, and in combination with health spending, a large proportion of consumption is culminated by the South Australian government. In addition, South Australia’s exposure to manufacturing supports its economic outlook, especially with a large technological focus and onshoring of supply chains. The leasing market has benefitted from the recent improvement in South Australia’s economic growth, and enquiries for industrial property in Adelaide were robust last year. However, actual take-up was below the long run average, constrained by low vacancies amongst existing buildings. Central to occupier demand in the second half of 2022 were the manufacturing and logistics industries, followed by the growth in mining and e-commerce. Recent leasing deals included the South Australia Police leasing 5,300 square metres at 26 Williams Circuit, Pooraka. A further 7,310 square metres was leased to an office supplies company at 71-79 Morphett Road in Camden Park. Adelaide’s main precincts experienced strong rental growth in the second half of 2022. Leasing incentives displayed some falls, reflecting vacancies falling below 1%. Incentives were particularly low in the Northern precinct where industrial space is the highest in demand. Average prime rents ranged from $90 square metres in the Outer South to $130 square metres in the West. Secondary rents experienced growth throughout 2022 and now average $77 per square metre. This rise in demand can be attributed to increased interest in the Inner North, Outer North and Outer South precincts, with greater availability of product, and a lower rental rates for the latter two. Land values growth slightly eased, whilst maintaining their upwards trend, in the second half of 2022. This is likely related to low industrial supply keeping prices high. Land value growth was sustained in the Outer North, Outer South and in the typically expensive Inner North regions. Key drivers of this strong growth have been influenced by the progression of the North-South Corridor (motorway) along with demand from owneroccupiers buying sites for new purpose built premises. The extent of increased demand for land has not only resulted in price increases but also greatly reduced land availability. Leasing market 18 Industrial Market Monitor | 1st Half 2023
The public sector remains a strong, direct and indirect consumer in South Australia, abating the softer near term outlook for the private sector and consumer demand. The near-term outlook for public demand is bullish as health spending was a focal point of the 2022 election. As in other states, rising interest rates will dampen consumer demand over the next couple of years, but the impact will be cushioned by a strong labour market. Several defence programs based in Adelaide including military vehicles, and the Space Agency will support growth in the medium term. Near term occupier demand for industrial property is likely to remain stronger than what underlying economic conditions suggest, before moderating. Additional storage space has been sought after by companies looking to manage higher inventory levels to mitigate disruptions in the supply chain, and this behaviour will continue during 2023. Over the short term, investment in road projects from the public sector is expected to continue. This will improve the accessibility of different industrial areas, influencing the location choices of some occupiers. Following the completion of the Regency Road to Pym Street section, work on the North-South Corridor project continues with preparations for the final stage – the 10.5 km Torrens to Darlington Project – underway. This section, which provides a bypass to twenty-one intersections, is set to further enhance transport links. Construction is likely to be delivered in stages, with final completion expected in 2030. An increase in secondary space in the established and centrally located areas, over the medium term, is expected as companies relocate to take advantage of road improvements and newer more efficient premises. In the process, some sites may be lost to industrial usage. Industrial property demand is also expected to be supported through other state and federal government initiatives, which could see fluctuations in take-up. Government commitments to defence projects will support the “Defence State” economy and several large projects driven by major aerospace, land and maritime defence companies are expected to be based in South Australia. Leasing outlook 19 55 Oaklands Road, Somerton Park SA 5044 Industrial Market Monitor | 1st Half 2023
20 After registering exceptionally strong sales values in 2021, activity in the Adelaide industrial market slowed last year, but remained above the long run average. Like many other markets, there is a shortage of completed deals to confirm where yields sit, but we surmise prime yields softened 25 to 40 basis points during the second half of 2022, as the impact of rising interest rates flowed through, ending the year between 5.0% and 6.8%. Across the regions, rising rents offset most of the yield softening, with prime values changes ranging from slight price falls to modest price gains during the second half of 2022. Major recent sales included: • 2-4 Oxenham Street, Dudley Park, was sold via a 30-year sale and leaseback by Ensign Services for $20 million on a yield of 5.48%. The property has a gross lettable area of 12,400 square metres; and, • 336-346 Richmond Road, Netley (8,000 square metres of warehousing and office space) was sold for $10.25 million to developers BuildTec. Investment market It is expected a slow phase of yield softening seen during the second half of 2022 will continue this year, spanning across the markets, including Adelaide. The next 12 to 24 months will see 10-year bond rates remain around or above current rates, before following the US and gradually tapering back to a longer term trend rate. As a result, sustained upwards pressure on the cost of capital, forcing investors to adjust their required return on investment. Adelaide’s narrow yield spread on industrial properties will unsettle many investors, causing yields to continue softening. Strong near term rental growth is likely to offset much of the near term yield softening which means capital values are not expected to suffer a significant setback. We anticipate no short-term change in Adelaide’s investor profile. If a large and newly developed asset with a long lease transpires, AREITs and other institutional investors are likely candidates, particularly if the lease captures future rental uplift. Hence, private investors and owner-occupiers will dominate the smaller end of the market. Investment outlook 19A Logan Street, Adelaide SA 5000 Industrial Market Monitor | 1st Half 2023
0 100 200 300 400 500 600 -4 -2 0 2 4 6 8 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 % annual change $ million Forecast Source: ABS State final demand (left axis) Total approvals (right axis) 21 Adelaide experienced little by way of new supply in Q3 2022, with no completions exceeding 5,000 square metres. Nonetheless, project completions ramped up in Q4 2022 with a 25,876 square metres Mainfreight warehouse on Gallipoli Drive in Regency Park completed, along with a 7,000 square metres building on 13-17 Sturton Road in Edinburgh, a 6,710 square metres warehouse at the Nexus North Industrial estate in Salisbury South and La Casa Di Formaggio’s 10,000 square metres facility in Edinburgh. As a result, over 120,000 square metres of new supply was added to stock last year, well above the long run average. Even so, low vacancy rates show that the market easily absorbed this supply. The Outer North remains a focus for supply, responsible for around half of the completions last year. Based on projects underway, the volume of completions across Adelaide is set to fall back towards the long run average this year with less than 100,000 square metres of new supply due to be added to stock (of which more than half the space is already committed). This years’ supply pipeline includes facilities for Chep (12,260 square metres), Apex Steet (21,980 square metres) and Linfox (21,850 square metres) along with the Osborne North future submarine construction yard. Looking at approvals, in MAT terms, the total value of warehouses and factories rose back towards peak levels at $350 million over the year to November. More than two thirds of this total was warehouses, most notably in the West and North regions. This suggests that the volume of completions is likely to pick up later this year. However, the strength of demand and low vacancies point to further rises in rents until substantial new supply is completed. Supply Supply outlook Adelaide demand and industrial building approvals Industrial Market Monitor | 1st Half 2023
PERTH Perth prime industrial market indicators Perth Eastern Net face rent ($ sqm) 135 Incentive (%) 1.5 Yield (%) 5.4 Capital value ($ sqm) 2,500 Leasing demand for industrial properties in Perth was strong last year, buoyed by the release of pent-up demand from delayed decisions during the pandemic, but also the relative strength of the West Australian economy. Actual gross take-up across the metropolitan area during 2022 was lower than in 2021, hampered by extremely low vacancy rates across the regions. Demand for industrial space in Perth is coming from a broad range of occupiers, most notably transport & logistics, companies servicing the mining and construction sectors, manufacturers as well as retailers (both pure play and omnichannel) servicing consumer demand. The most aggressive competition for space last year (which has continued into this year) is for options less than 3,000 square metres in area, with less intense demand for larger buildings. Strong occupier interest from both tenants and owner occupiers, but a shortage of available stock is constraining both user groups. The desire to occupy additional space to store higher inventory levels has eased in Perth over the last six months, with many businesses looking to expand to keep pace with servicing growing local demand. Vacancy rates across the Perth metropolitan area have dropped to less than 0.5% at December 2022, with the strength of demand outstripping modest completions. The market tightness is evident across the East, South and North, with little existing space available to lease. Reflecting the rapid tightening in the market last year, average prime rents rose rapidly across the regions during 2022. In the benchmark East, average net stated prime rents increased by circa 30% over 2022 to $135 per square metre. Prime rents in the North and South also reached a similar level by December last year. Leasing incentives fell at a rapid pace during 2022 as the swift recovery in the leasing market flowed through. At December 2022, prime incentives in the benchmark East were 0 to 3%, at an average 1.5%. that some institutional owners are offering incentives up to 7% for new builds with precommitment rents less than existing prime space, but many tenants are not able to wait for new supply to be delivered. Leasing market 22 Industrial Market Monitor | 1st Half 2023
Over the next two years, the Western Australian economy (on which leasing demand for industrial property depends) is expected to slow down as higher interest rates dampen activity. Even so, with State Final Demand (SFD) growth forecast to exceed 2.0% per annum, the Western Australian economy is expected to outperform the national economy. We anticipate that a solid pipeline of resources investment will place a floor under growth over the near term. Indeed, we forecast an upswing in engineering construction in Western Australia, from $19 billion in the 2022 financial year to $26 billion by June 2024. Major projects driving this investment growth include the second stages of the Pluto and Gorgon LNG projects as well as stage 2 of the Iron Bridge, iron ore scheme. A repairing state budget combined with funding for the Perth City deal, is set to see public investment pick up over the medium to longer term. Major infrastructure projects including the staged Metronet (already under construction) will also provide further support. The substantial investment in resources will drive Western Australia’s exports and gross state product over the next couple of years. However, resources exports will not underpin much new demand for industrial space as they are transported directly to the ports. Growth in SFD has a much stronger multiplier effect on demand for industrial property than does production. Here, the outlook is positive. The strength of the Western Australian economy will continue to encourage businesses to invest in additional capacity over time, boosting demand for industrial property. We also expect transport and logistics operators in Perth to continue the broader supply chain efficiency drive underway Australiawide to cater to structural changes in consumer spending, most notably the continued growth of online retail and firming up local supply chain capacity to service local consumer demands. Looking forward, we foresee demand easing, but remaining positive, this year and next, before strengthening in 2025. The strength of demand for industrial property should help keep vacancies contained. In response, further rises in industrial property rents are expected. Leasing outlook 23 Industrial Market Monitor | 1st Half 2023
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