Despite ongoing economic challenges, the industrial property market remains steadfast, with the average national prime industrial values rising from $3,300 per square meter in the first quarter to $3,420 per square meter in the second quarter of this year.
This growth has occurred even as yields have slightly softened by approximately 18 basis points during the same period. Gavin Bishop, the Head of Industrial Capital Markets at Colliers, notes that rental rates have played a crucial role in mitigating the impact of the average national prime yields of 5.27 per cent.
As a result, industrial property values have now returned to their levels at the beginning of 2022.
“Following a contraction in average capital values through parts of 2022 as yield expansion outpaced rental growth, the situation has now reversed,” Mr Bishop said.
“Average prime national rental growth of 40 per cent over the last 18 months has established the industrial sector as a stalwart in the broader commercial real estate investment market.
“As attention is drawn to industrial yields, it’s important to note their diluted impact on values has continued to attract new institutional and offshore investors.
“More recently, this included Cadillac Fairview partnering with Gateway Capital to create a $1 billion logistics fund.”
According to research conducted by Colliers, prime industrial properties in Sydney and Melbourne remain highly sought-after investments, with an average rental growth rate of 48 per cent and 29.9 per cent, respectively, since the first quarter of 2022.
In Sydney, despite yields moving to a range of 4.5 per cent to 4.75 per cent, rents have played a pivotal role in driving an 8.9 per cent increase in prime industrial property values during the same period. Similarly, in Melbourne, industrial property values have experienced a minor decline of 2.8 per cent, but this has been mitigated by rents, as current prime yields moved to a range of 4.75 per cent to five per cent.
The surge in industrial transactions, rising from $440 million in the first quarter to nearly $1.3 billion in the second quarter of this year, can be attributed to value-add investors seeking to reposition or upgrade their assets. However, leasing inquiry levels have returned to more typical levels after reaching record highs in 2021 and 2022, according to Luke Crawford, Colliers’ Director of Research.
“While industrial leasing demand has subdued slightly due to economic conditions, the sector would need to jump from the current vacancy rate of 0.8 per cent to the equilibrium of 4.5 per cent, before market rental growth could be questioned,” Mr Crawford said.
“For the sector to get back to a vacancy rate of 4.5 per cent, an additional 2.9 million square metres of vacant stock would need to become available, which hasn’t occurred since we began tracking vacancy levels ten years ago.
“Since 65 per cent of stock currently under construction is committed, and rental growth has continued to outpace historical averages, we expect it to remain elevated throughout 2023.”
Increasing by 7.3 per cent in Q2 2023 and 28.3 per cent over the past year, some industrial markets may witness over 30 per cent rental growth for the 2023 calendar year, according to Colliers’ research.