Over the last 24 months, the industrial property market has seen a value surge like no other. As the halfway point of 2022 is in our sights, we thought we’d share a snapshot of one of the most exciting sectors in Australian property investment.
We’re nearly halfway through 2022 (thanks to our accountant for reminding us), and as commercial real estate experts with our fingers firmly dipped in several outstanding industrial assets, we thought we’d provide our readers with a snapshot of one of the most exciting property sectors of the last 24 months.
Industrial property across the country has seen an incredible increase in demand since COVID-19 appeared on Australian shores. The appetite for logistics and warehouse premises has perhaps been unprecedented, with the flavour of the last two years being logistics and warehouse assets.
Industrial tenants have either kept their feet firmly planted inside their existing premises or searched high and low for a new location. Investors have suffered a similar experience with the tight supply in the industrial market producing extreme FOMO (Fear Of Missing Out) for the many punters who’ve been unable to secure a high-quality asset.
Let’s dive deeper into Australia’s industrial property sector as it currently stands and find out how we got into this incredibly tight market.
A resilience to the COVID-19 pandemic has created enormous buyer demand in the industrial property market. The ‘primary and/or essential services’ classification across majority of industrial users has meant this sector experienced little rental loss during the pandemic, which has prompted enormous investor demand.
COVID-19 restrictions and the “new normal” the pandemic has put us in has created significant appetite for four particular sub-sectors of the industrial property market:
- Online retail
- Cold storage
- Delivery services
The pandemic has helped increase tenant requirements for quality logistics and/or warehouse spaces in these sub-sectors.
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Industrial vacancy rates are currently at all-time lows. When coupled with huge tenant demand, there’s a short-term window for positive rental growth which is of course remarkably attractive to buyers.
According to the Australian Property Journal, vacancy across Sydney, Melbourne, Brisbane, Perth and Adelaide is now sitting at an all-time Australian low of 1.3%.
Reallocation of capital
There has been a drastic softening in both leasing and buyer demand in the office market. This is a market that typically accounts for the majority of institutional-grade investment capital.
This softening in office property demand has created a reallocation of capital. And it’s headed directly toward the industrial sector. The result? It’s sparked a huge surge in both demand and competition, and accordingly a significant response in pricing.
And to further boost asset values, the interest rate environment has up until now been hugely favourable to investors. The ability to borrow money at a historically low rates has put more buyers in the market and caused industrial property values to defy gravity. The proof is in the growing market demand from institutional buyers for assets of $50 million-plus.
Further increases in interest rates are on the way and this could have a material impact on asset prices and demand. The question is when this impact will occur. It may take several rate rises before industrial values begin to decline as more buyers leave the market.
On the tenant side of the equation, rental growth has become so significant that there is a risk of affordability becoming a concern for occupiers. This upward pressure on occupancy costs isn’t set to slow down anytime soon, so landlords should be doing everything possible to maintain tenant satisfaction to ensure an occupied premises.
One thing’s for certain, there hasn’t been an industrial market like this for a long time, and it may be years (or decades) before we see it come around again.
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