This article is from the Australian Property Journal archive
AUSTRALIA’S industrial and logistics supply pipeline for 2022 is down 600,000sqm in new space, thanks to ongoing construction delays and rising costs, which is in turn pushing up rents.
According to CBRE Research’s Q3 2022 Industrial & Logistics Figures report, the 2022 I&L supply pipeline has been cut down by nearly a quarter of the initial forecast, with the outlook for the combined major cities now downgraded from 2,700,000sqm to 2,100,000sqm.
While the overall pipeline for the year is diminished, the report found A total of 654,000sqm of new supply came online in Q3, bringing the year-to-date figure to 1,400,000sqm, just below the long-term average of 1,500,000sqm.
Major factors contributing to construction delays include wet weather, labour shortages, rising costs stemming from material shortages and supply chain disruptions.
“For some projects, this is adding up to delays of six-to-12 month,” said Cameron Grier, regional director of industrial & logistics at CBRE, Pacific.
At the same time, 41% of the current forecast 2023 supply pipeline of 2,500,000 is already subject to pre-commitments.
This while Australia’s I&L vacancy rate sits at a world low of 0.8%, with Sydney’s rate the lowest at 0.3% and Brisbane the highest at just 1.4%.
“Coupled with the lack of supply being brought to market, when you overlay some 40% increase year-on-year in construction costs and softening cap rates, it’s putting even further upward pressure on rents to hit the new return hurdles of investors,” added Grier.
The report revealed record rental growth for super prime assets, up 6.7% quarter-on-quarter, with all grades seeing rent increases of 16-19% for the year nationally.
Compared to this time last year, weighted-average net face rents for super prime facilities are up 19.2%, with the national average sitting at $134/sqm.
Weighted-average net face rents for prime- and secondary-grade assets were also up, growing 18.6% and 16.0% respectively for the year.
So far in 2022, Sydney and Perth have seen the largest growth, up 29.6% and 24.3% respectively for super-prime assets. With Perth also recording the largest bump for the quarter at 9.3%.
“To bring the Australian market to a state of equilibrium, around 3.7 million sqm of space is required and only 2.5 million sqm is currently under construction,” said Sass J-Baleh, head of industrial & logistics research at CBRE, Australia.
“Therefore, we can expect strong real rent growth to continue over the next three years, averaging at just over 6% per annum.”
Meanwhile ongoing strong demand for industrial space across Australia’s eastern seaboard has pushed rents higher, helping preserve the capital values of industrial assets as yields begin to soften in some markets.
According to Cushman & Wakefield quarterly Marketbeat report, industrial rents for the year to July had already increased 24% in Sydney, making it the fastest-growing industrial market across the Asia Pacific, outpacing rental growth in 31 tier one and tier two markets across the region.
Strong rental growth continued across all Sydney industrial sub-markets in the September quarter. Average prime net face rents increasing 17% over the six months to September to average $190 per sqm. This included South Sydney lifting roughly 10% in six months and 35% year-on-year due to low supply because of strong tenant demand, and the completion of prime properties attracting higher rents.
Other Sydney markets have also experienced strong rental growth over the past year. Prime net face rents are up 27% in the north west to $160 per sqm, up 23% in the south west to $160 per sqm, up 20% in the outer west to $160 per sqm, and by 15% in the central west to $170 per sqm.
Average prime yields in Sydney were steady at 3.7%. NSW-wide industrial transaction volumes were robust in the six months to September, with volumes increasing from $385 million in the March quarter to $1.7 billion in Q2 before $647 million in Q3. While Q2 was down moderately compared to the same quarter in 2021, 2022 volumes are strong compared to historical averages.
Land values push up rents
Average prime face rents in Melbourne lifted in both Q2 and Q3 “under unprecedented upward pressure from land value accretion” while showing an 11% increase in the year to July. The south east saw rents increase almost 20% to $130 per sqm in the six months to September, and 22% in the west year-on-year. Incentives were averaged between just five and 15%.
Interest rate and inflationary pressures slightly tempered sales activity. Victorian industrial transaction volumes tallied $867 million in Q2 and $392 million in Q3 after $1.2 billion worth of deals was recorded in Q1. Average prime yields for institutional-grade assets was 4.25% in the south east, east, and west. Cushman & Wakefield expects investor demand for industrial assets to remain strong where higher yields compensate for perceived risks,
Meanwhile, industrial leasing activity in Brisbane continued its strong run from 2021, with average prime net face rents increasing 15% in the 12 months to September to $135 per sqm. Incentives remained tight across all precincts. Vacant land values surged 45% year-on-year for parcels above 10,000 sqm.
Following a record 2021, transaction volumes in Queensland continued strongly and totalled $816 million in the first half before returning to the long-term average with $224 million in the September quarter. Average prime yields softened slightly to 5.60%.
