Colliers says the industrial pipeline looks set to continue despite mounting headwinds and rising construction costs as confidence in the leasing market and rental growth both remain high.
It adds that construction costs have increased by more than 50 per cent over the past year, but predicts relief is on the way in the back half of 2022.
“As a result of construction costs moderating, tender pricing will become more competitive for the remainder of the year, aided in part by new entrants into the industrial construction sector,” Luke Crawford, Colliers Industrial Director of Research, says.
“Nonetheless, we expect there will be a flight to quality with regards to builders and contractors and industrial developers are expected to gravitate to high-quality tier one builders who have a track record of managing price variations,” he adds.
Colliers notes Industrial leasing demand reached record highs in Q2 2022, with almost 1.5 million sqm leased in the quarter for deals more than 5000 sqm.
It says consistent levels of demand led to the completion of almost 440,000 sqm in Q2 2022 – a substantial increase from the 330,000 sqm recorded in Q1 2022.
It adds that this demand is continuing to protect the industrial sector against rising construction costs, which now average $11000 to $1300 per sqm or higher, indicating a rise of more than 50 per cent in the past 12 months alone, and up from a range of $700 to $850 per sqm 12 months ago.
A reduction in construction costs will also mean the lead time for sourcing select products and materials will reduce, which has currently blown out from two-to-four weeks to six months or more in some cases.
“An example is concrete pipes which recently experienced delays of up to 46 weeks, and subsequently led to initial bulk earthworks delays, but we are yet to see any developers shelve projects at this stage and we don’t expect many to do so,” David Hall, Colliers Industrial National Director, says.
To date, the industrial sector has also been able to absorb rising construction costs through increased rents, low land values when purchased or yield compression.
With yields softening and land values moderating, the feasibility of select projects is being tested, just as construction prices have reached their peak and should ease towards the end of 2022 into 2023, as builders have greater certainty around pricing.
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