Industrial supply hits 13-year high

The volume of industrial supply in Australia’s east coast cities completed in 2020 and planned for 2021 is at unprecedented levels, spurred on by strong tenant demand for prime warehousing facilities. MHD speaks with Knight Frank’s Katy Dean and Darren Benson about the group’s latest research.

The Knight Frank National Industrial Market Report March 2021 found new industrial development on the eastern seaboard reached two million square metres in 2020; a 13-year high for the sector.

The outlook for 2021 is likely to exceed that level, with 2.2 million square metres in the pipeline; 80 per cent of which is expected to be delivered in Sydney and Melbourne.

Knight Frank Associate Director of Research & Consulting Katy Dean says the intensity of demand from e-commerce and logistics-related users in the industrial market was providing the impetus and confidence for developers to move forward with new projects.

“Developers are trying to keep pace with the growth in tenant demand largely created by the growth in online retailing, with $3.5 billion transacting in 2020, up from $2.3 billion in December 2019.

“The sustained uptick in online sales, which coincided with the pandemic, has translated into increased demand for larger scale and more advanced warehousing to accommodate bigger inventories.

“Increased spending on consumer staples, as well as a rise in the manufacturing and storage of pharma goods, is also driving tenant demand and a strong rebound in the take up of vacant supply on the east coast.”

Katy says new industrial speculative development was booming in 2019 and the short leasing periods on this space provided significant momentum for developers to push ahead with new projects, creating short-term rises in vacant space at the end of 2019 that carried into the start of 2020.

The Knight Frank research found that over the fourth quarter of 2020 there was 732,000sq m in take up in Australia’s east coast industrial market, with a 7 per cent decrease in vacant space over the December quarter to just over 2.22 million square metres, down from 2.39 million square metres in the previous quarter. This is the largest quarter on quarter decrease in vacant space since Q1 2017. 

Knight Frank Partner and National Head of Industrial Logistics Darren Benson says investors had thrown their weight behind the industrial sector, with a significant amount of capital being allocated by REITs for acquisitions and potential future projects.

“While institutions have been actively expanding land banks for a few years, there was a clear shift in strategy last year to increase asset allocations to the sector through their development pipelines,” he says.

“Despite the pandemic, spec schemes are still high on the radar, with most major REITs stepping up their exposure through development.

“Between Dexus, Charter Hall, GPT, Mirvac and ESR there is more than $8 billion in capital for potential future projects, which is hugely significant.”

The Knight Frank National Industrial Market Report March 2021 found national investment volumes in the industrial property market have risen to a decade high, reaching $8.8 billion in 2020, up from $7.7 billion in 2019, reflecting the increasing popularity of the sector.

The recent Knight Frank Attitudes Survey results, revealed in Knight Frank’s The Wealth Report 2021, found the industrial sector was the top sector of interest for Australian ultra-high-net-worth individuals, with 40 per cent saying they were interested in investing in industrial property. 

Other sectors rounding out the top five included agricultural (27 per cent), logistics (22 per cent), healthcare (22 per cent) and residential private rented sector (20 per cent).“Rising industrial property returns are now outperforming the office sector, driven by e-commerce growth and its safehaven status in the wake of COVID-19,” Darren says. 

“Portfolio sale and leaseback activity has been high, but the trend is now gaining traction with individual assets.”

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