High demand for industrial property sends rents soaring

Commercial Property Update: Vanessa Rader

Over the last two years we have seen a swift increase in demand for industrial assets.  COVID-19 was the catalyst for the resurgence of the industrial market with an uptick in requirement for logistics, transport and warehousing of goods in response to a growth in online retailing. Similarly, a change in working conditions saw many small businesses borne from employers’ rationalisation and an uptick in manufacturing, seeing smaller spaces taken up, notably, in infill industrial markets which have been hampered by longer term high vacancies.

As a result we have seen Australian prime face rents grow as much as 30 per cent over the last year depending on quality, location, and size of asset. Vacancy is at an all time low and the geographic spread of demand is broader than ever before, to cater for these local businesses, and to improve supply chain distribution, servicing the increased demand for rapid delivery.

Rising need for quality spaces has been further held back by the halt to new developments over the past few years. With construction sites closed down over COVID-19 and push out in planning timeframes we have seen new supply into industrial stall. Coupled with the strong increases in material costs and labour shortages, any new projects which do get off the ground are dictating new highs in capital values or rents to justify completion.

To further exacerbate this, land values continue to appreciate. Sydney continues to be the most expensive market growing by close to 25 per cent over the last year in some regions, notably for smaller lots; while ACT, Brisbane, Melbourne, Adelaide and Perth have all followed suit, increasing values of between 5 per cent and 20 per cent, adding to development costs and in turn occupancy costs. For owners this also translates to an increase in outgoings which is often charged to the tenant further adding to their existing high rental rates.

With industrial investment recorded at a high rate over the past couple of years, demand has continued in 2022 with industrial now regarded as the investment of choice for private and institutional investors, both domestically and internationally. Investment yields have reduced to as low as 3.25 per cent in prime markets, which was expected to moderate given the rising interest rate environment. However, given the ongoing lack of quality accommodation options, keeping vacancy low and the supply pipeline limited, there is further scope for rental growth across the broader industrial market over the next 12 months. This is likely to keep interest in industrial as an asset class elevated, keeping yields below other commercial asset classes in the short to medium term.

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