The commercial property darling of the pandemic, industrial real estate, is set to continue to enjoyable favourable conditions as demand for space outpaces what’s available.
In a newly released report from KPMG for the quarter ended 30 June, titled The Australian Real Asset Economy, the firm said demand for space is due to a combination of cyclical and structural factors.
Low interest rates, comparatively strong economic activity, and the expansion of e-commerce have all helped to support cyclical demand, the report said, while e-commerce as well as technology disruptions in the shift from on-floor to on-line retail sales/delivery models.
The relatively tight space market conditions have seen land value and rental rates both grow while a combination of favourable space market and capital conditions is reflected in historically tight cap rates, which have firmed by c90bps over the year to 4.3 per cent at March 2022.
“The industrial property sector is set to experience cyclical weakness in space market conditions in line with a slowing in economic activity,” the report noted.
“However, we believe it will outperform other sectors due to strong structural demand for storage /logistics & warehouse space, with the shift towards on-line retailing helping vacancy rates to stabilise.”
Over the next 12 months, the report forecasts investor appetite for industrial assets to remain relatively strong as they continue to reweight capital allocations due to the sector’s higher risk-adjusted returns.
Asset pricing is likely to be favourable, the report noted, but interest rate rises are likely to result in a slower pace of cap rate compression.
The industrial giant, Goodman Group, recently reported in its FY22 report that it recorded the strongest six months of rental growth in its history in the second half of the financial year, outpacing construction costs.
“Goodman Group delivered a strong result for FY22, reflecting the strong demand for industrial space in our markets,” CEO Greg Goodman said.
“Our customers’ need for more productivity and sustainability from their supply chains continues to drive demand. By focusing our portfolio and $13.6 billion development workbook on key infill locations, we have had seen accelerating market rental growth, significant valuation uplift and subsequent outperformance of our Partnerships.
“While interest rates and inflation may impact consumers, they continue to seek faster and more flexible delivery. This requires ongoing intensification of warehousing in urban locations to optimise delivery and we’re working closely with our customers to maximise productivity and sustainability in their facilities.”
JLL’s 2Q 2022 Research figures have recorded the strongest year-on-year GSP weighted average rental growth in national industrial markets in 33 years.
Prime net face rents have increased by 6.22 per cent quarter-on-quarter nationally over Q2 – outperforming the previous 25-year record set last quarter (3.25 per cent q-q). Nationally, year-on-year rental growth has averaged 14.9 per cent
“The challenge for tenants will get worse before it gets better, with limited space options for tenants in most markets just as they need to increase inventory levels in the lead up to Christmas,” JLL’s Head of Industrial & Logistics – (Australia) Peter Blade said.
“Though there is some availability in upcoming supply, many developers are waiting to closer to practical completion dates before signing deals with tenants, knowing that rents are escalating fast and seeking to lock tenants into higher rental commitments.”
Gross take up of industrial space for the quarter reached 773,260 square metres in 2Q 2022, marginally exceeding the national 10-year quarterly average (670,250 sqm) for a seventh consecutive quarter even through very low vacancy in some markets is limiting occupier moves.
Goodman reported that demand is currently exceeding supply in its market.
Jesse Curtis, Centuria Industrial REIT Fund Manager, said a sustained increase in tenant demand and a limited supply drove industrial rents nationwide.
In the group’s FY22 statement, Curtis said industrial real estate continues to see favourable conditions with increasing e-commerce and a securing of supply chain resilience is driving strong demand.
“Domestically, despite recording strong rental growth during FY22, Australia’s industrial market continues to see robust tenant demand,” he said.
“Labour shortages, supply change disruption and limited industrial zoned land have resulted in new industrial accommodation being in short supply.”