Australian industrial property sector to see solid demand in the long-term

Rising transportation costs is one of the key reasons.

According to Dexus Research, the Australian industrial sector continues to benefit from a period of strong demand, falling vacancy rates and robust development activity. 

Demand is very broad-based including medical supplies, supermarkets and groceries, agribusiness, materials supporting transport infrastructure and retailers investing in last mile fulfilment. 

Here’s more from Dexus Research:

The outlook for leasing in FY23 is more subdued given the possibility that rises in interest rates will slow spending on retail goods. On a positive note, leasing activity is expected to be supported by a continued build-up of inventories from below trend levels and by retailers enacting long term plans to invest in multichannel supply chains. 

Nevertheless, there are reasons to expect solid demand in the longer term. The Australian online retail market share (14%) lags the US (18%) so it will keep growing over the next few years albeit at a slower pace. In addition, over the next five years population growth is expected to increase at one of the fastest rates in the OECD. Rising transport costs are also influencing rents that users are willing to pay for certain locations. The fact that transport accounts for up to 50% of a tenant’s costs while rent accounts for 5.0% reinforces the importance of having well located properties. 

Development activity has accelerated yet is struggling to keep pace with demand. Over the past six months the national vacancy rate has fallen to 0.8% following strong levels of pre-leasing activity. Around 1.2 million sqm of supply is forecast this year however around 63% of this supply is already committed. Supply chain disruptions and land zonings look to influence the timing of future projects with vacancy remaining low in the short term. 

Strong demand and low vacancy rates are pushing up on rents with many markets experiencing double-digit rent growth over the past year. Developers should continue to be able to pass higher construction costs onto users in FY23. Going forward, land values will be sensitive to any rise in cap rates from cost of capital effects. Over the past six months the Sydney and Melbourne industrial markets experienced circa 30% growth in land values.