Surpassing the previous record set back in 1988, the Australian industrial and logistics sector has completed its best year on record providing a total return of 23.2% this year to June 2021.
Underpinned by the continued shift to online retail, and the requirements for big box distribution centres and last mile hubs close to the end consumer, the industrial and logistics boom has also delivered leasing and investment records.
“Leasing demand is forecast to well exceed four million sqm for the 2021 calendar year, up from the 3.3 million sqm in 2020, which was also a record, while investment volumes have already reached $12 billion. This is well above the previous record high of $7 billion set back in 2016,” Luke Crawford, Colliers Director of Industrial Research, explains.
As reported in Colliers’ Industrial Research and Forecast Report for the second half of 2021, the advent of Covid-19, and the flow-on effect from lockdown management strategies, led to an acceleration in online shopping adoption by five years in 2020. And while this acceleration paused early 2021, the lockdown periods in NSW and Victoria this year re-ignited accelerated online sales growth, increasing by almost 30% year-on-year to August 2021. Online sales now represent 13.9% of total retail sales and Colliers’ forecasts suggest this will grow to approximately 18% by 2025.
“The sector’s outlook continues to be positive, but potential headwinds that may impact performance in 2022 could stem from low levels of population growth and the weaker than expected economic recovery given recent lockdown measures. Nonetheless, economic growth is forecast to total 1.0% for the 2021 calendar year before increasing to 7.4% in 2022,” Mr Crawford says.
With record leasing demand recorded, running at over 3.7 million sqm leased nationally in the first three quarters of 2021 (>5,000 sqm), demand remains most pronounced for prime space with substantial demand recorded for pre-lease and speculative space. Over 1.5 million sqm of take-up in 2021 has stemmed from pre-lease or speculative developments, representing 41% of total demand. The Sydney and Melbourne markets have underpinned this strong result, while there has also been a sharp rise in leasing activity in the Brisbane and Adelaide markets, which reflects the improvement in local economic conditions
Vacancy rates continue to fall swiftly, with national vacancy rates for facilities >5,000 sqm falling to 2.8% in Q3 2021 from 3.5% in Q2 2021 and 5.1% in Q3 2020. The fall in vacancy rates over the Q3 period was underpinned by a large fall in the Brisbane market, while vacancies in Sydney and Melbourne remain at, or close to, historic lows. This pressure on available industrial space has led to a surge in speculative developments.
“Propelled by record leasing demand, developers and institutional groups have progressed speculative developments, there is currently over one million sqm of speculative developments under construction along the East Coast, 30% of which will reach completion in Q4 2021, and the balance will complete in 2022,”
Mr Crawford says. “Melbourne accounts for the largest share of speculative space under construction at 52% of the national total, followed by Sydney at 35%. For Brisbane, speculative space due to be delivered in 2021 has increased 57% on the levels recorded in 2020 and is expected to accelerate further in 2022.”
Nationally, industrial completions are forecast to total 2.05 million sqm in 2021, before picking up to 2.4 million sqm in 2022. Supply will remain dominated by the Melbourne market, while Sydney is expected to see a large rise in completions from 2022 given land availability within the Mamre Road Precinct and several large-scale developments which have recently commenced. The tight supply levels have increased prime net face rents nationally with a 4.3% year-on-year increase to Q3 2021, while growth in the secondary market was higher at 5.2% over the same period.
There has been a significant re-weighting of capital towards the industrial and logistics sector with over $12 billion in industrial and logistics transactions occurring in the nine months to September in 2021 (>$10 million), when compared to $5.5 billion for the entire 2020 calendar year. And as Gavin Bishop, Head of Industrial Capital Markets, explains, there are significant levels of domestic and offshore capital still looking to enter the Australian industrial market.
“This year has been the year of portfolio transactions with $8.4 billion trading from portfolios so far in 2021, representing 70% of total investment activity,”
Mr Bishop says. “And while $12 billion is a record year of investment within the sector, approximately $40-50 billion of capital looking to enter the sector remains. This is creating significant competition for assets and major portfolios from both domestic and offshore capital.”
“These intense levels of competition for industrial assets and limited levels of supply in key markets, has led to many institutional groups adopting new investment approaches, such as a build-to-core strategy.”
In Colliers’ view, yield compression is expected to continue until mid-2022 before stabilising thereafter. By this point, average prime yields are expected to sit closer to 3.5% in Sydney and Melbourne, while Brisbane will be closer to 4.0%. For Adelaide and Perth, sub 5.0% yields are expected to become more prevalent.