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
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