Australian industrial and logistics property is currently the most sought-after property asset class. Luke Crawford, Associate Director | Research and Malcom Tyson, Managing Director, Industrial at Colliers International provide a 2021 outlook for the Australian industrial and logistics sector.
Australian industrial and logistics property is currently the most sought-after property asset class, over $4.3 billion has traded within the sector this year, underpinned by favourable structural tailwinds which continue to positively impact the division.
The rapid increase in e-commerce coupled with expansion requirements from supermarkets and pharmaceutical companies, has had a positive impact on Australian REITs (A-REIT) with exposure to industrial property.
According to a Capital Markets outlook for 2021, Colliers International predicts the industrial and logistics investment market is expected to gather further momentum in 2021. Malcom Tyson, Managing Director, Industrial at Colliers International says the early signs of market recovery are starting to appear and strong growth can be expected into the new year off the back of stabilized business and consumer sentiment.
Luke Crawford, Associate Director | Research at Colliers International says the pandemic has emphasised the importance of logistics as a key cog within the economy and occupiers will have to further embrace changing consumer preferences. According to Australia Post’s October e-commerce report, online sales have grown by almost 80 per cent and there is no doubt the industry is hurtling towards the biggest peak in online shopping history.
Luke and Malcom agree that looking ahead, strong leasing demand is expected across industrial markets in 2021, underpinned by the continued growth of e-commerce, which will bolster warehouse demand. “The sector’s landscape has changed significantly, but the market should be prepared and excited by the changing market conditions that can work in industrial occupiers and investors favour next year,” he says.
How did industrial property perform in 2020?
“2020 will be remembered as the year of industrial property, it’s gone from the poor cousin to the favourite uncle of the real estate sectors,” Luke says. Almost overnight, the world was disrupted this year. Businesses have been forced to adjust to supply chain disruptions and as a result, the sector has seen a significant investment in supply chain management solutions and diversification of supplier networks. Due to the unforeseen circumstances, did any predictions for the industrial property market meet expectations?
Luke says although the pandemic couldn’t have been predicted, it certainly was a launching pad for the industrial and logistics sector, outperforming all other mainstream real estate sectors. At the start of the year, Colliers forecasted a record year for leasing volumes. “Whilst they’re slightly down on what we forecasted, volumes are up considerably nationally from this time last year,” he says. That’s underpinned by the pre-commitment market, such as Amazon’s new 200,000sqm facility that’s set for Western Sydney and Woolworths pre-committing to 75,300 sqm across two facilities within the Moorebank Intermodal Terminal highlights this with the national distribution centre expected to be semi- automated while the regional distribution centre is expected to be fully automated.
In the 12 months to September 2020, the industrial sector provided a total return of 11.2 per cent, broadly split between capital and income return, and was above the 6.8 per cent and -10.0 per cent recorded for office and retail sectors respectively over the same period.
Malcom and Luke say that the leasing market has remained strong, underpinned by requirements from transport, retail and food logistics groups. However, deals are taking longer to get over the line given the uncertainty on business operations and occupiers are increasingly staying put within their current facility. “It’s important to note that despite the challenges, the investment market hasn’t skipped a beat with the depth of capital from local and offshore groups remaining significant post COVID-19,” Luke says.
According to the Colliers Directors, supply chains were always going to strengthen this year, and the clear winners in 2020 are those occupiers tied to e-commerce, food logistics, pharmaceutical and transport and logistics. Luke notes that the big winner in the investment market has been prime core assets backed by a strong covenant where continued yield compression has been recorded as the flight to quality thematic plays out.
“The sector has since proven how resilient it has been with leasing enquiries growing strongly from the second half of this year. We expect economic conditions to improve in Q4 2020 and into 2021 which will further support spending patterns and industrial occupancy demand.”
E-commerce to result in record industrial leasing demand
Luke says there are several trends and themes which have emerged and will continue to shape the sector in 2021 and beyond. “The giant itself, e-commerce, will continue to surge and translate into strong growth for warehouse demand as ‘pure-play’ online groups and retailers look to bolster their fulfilment capabilities,” he says. “It will definitely moderate itself throughout 2021 and beyond, but e-commerce will have an important impact on industrial property. In 2019, Australians spent $61 billion on overseas travel and with our international borders likely to be shut for some period, a large chunk of this money will be deployed on retail goods, both online and in stores, which will support demand for industrial space.”
The experience from the US shows that for every one billion AUD spent on online sales, approximately 85,000 sqm of warehouse space is needed – three times the amount of warehouse space required for traditional brick-and-mortar sales. Using the same measure locally, this would have translated into ~580,000 sqm of warehouse demand from the additional $6.9 billion spent on online sales over the past year.
“Online grocery and food sector has experienced rapid growth over the past 12 months, up over 80 per cent in the year to September 2020. We expect this growth to prompt increased demand for cold storage logistics space in 2021,” Malcom says. Malcom said looking ahead, online retail is expected to further increase in popularity as consumers embrace online shopping platforms.
“We are forecasting online retail spend to total circa $58 billion by the end of 2022, which would translate into warehouse demand of around 2.7 million sqm between now and then from e-commerce alone, based on experience from the US.”
Successful return of confidence
“We’re going to see a lot of activity in 2021. Occupiers can expect a whole lot of efficiency gains, it’s going to be a pretty busy year and a lot of focus will be on the bottom dollar,” Malcom says. He notes that beyond next year and across 2022-23, the industrial market will join other sectors in playing catch up from 2020’s disruption to the market.
“Melbourne has been the most impacted due to the city entering a Stage 4 Lockdown, however the investment market within Melbourne remains strong with transaction volumes in 2020 already surpassing the levels recorded in 2019. We’re confident a number of significant transactions will be on the cards, as forecasted for other major capital cities and regions in Australia,” Luke says.
Malcom highlights that leasing demand is expected to accelerate in 2021 as businesses have more clarity around the short to medium term impacts of COVID-19 on their operations. Demand is expected to be led by pre-commitments as occupiers focus on automation and efficiencies. “Indeed, a major record year of leasing demand is expected across most markets, underpinned by the continued growth of e-commerce which will bolster warehouse demand,” Luke added.
Rents have remained flat across most markets in 2020, however, growth is expected to pick-up in 2021 towards the longer-term average while incentive levels are expected to stabilise following the recent increases. “Certainly overall, the outlook for the industrial and logistics investment market remains positive and is expected to gather further momentum in 2021,” Malcom says.