The Australian industrial market is set to continue its upward momentum, with a burgeoning deal pipeline in the second half of the year set to eclipse the $5.4 billion of sales recorded in 2014.
Despite subdued transaction activity in the first half of 2015, a number of significant deals are due to cross the line over the next few months, CBRE’s 2015 Q2 Industrial MarketView shows.
In the first half of 2015, $878 million in industrial property changed hands – the slowest start to a year since 2010.
CBRE Regional Director, Industrial & Logistical Services, Matt Haddon said the sale pace would increase over the next six months, with volumes likely to overtake 2014 levels.
“With a number of major deals either being marketed or in due diligence at present, sale volumes are on track to top the $5.4 billion achieved last year,” Mr Haddon said.
“Given the strength of investor appetite at present, new prime logistics opportunities coming to market are being snapped up by buyers eager to gain a footprint in what is increasingly regarded as a highly attractive sector.”
The report shows residential rezoning is placing pressure on industrial markets across the country, with supply shrinking as developers buy up land for higher and better use options.
“This change of traditional industrial land use trend will increasingly bring new tenant enquiries to the market and stimulate development and investment supply, as occupiers relocate to free up sites earmarked for higher and better use,” Mr Haddon said.
In Victoria, city fringe locations such as Port Melbourne and pockets of the south-east market including the Clayton industrial precinct are expected to see supply contract as growing demand for residential development presents opportunities for the rezoning of brownfield industrial sites.
[urbanRelatedPost][/urbanRelatedPost]CBRE Senior Research Manager Mark Lafferty said the main rezoning driver for sites was the surrounding residential catchments and infrastructure, with industrial zoning no longer optimal.
"Tenants of these sites have relocated to surrounding sites and suburbs, allowing land owners to unlock value through future residential developments,” Mr Lafferty said.
South Sydney’s industrial market has also felt the squeeze from residential conversion activity, with large parcels of industrial land rezoned, resulting in higher land values.
Mr Lafferty said the next wave of residential conversion activity was already underway in Homebush and Melrose Park, with the trend expected to continue across the city’s industrial precincts.
“Some tenants are already under pressure from residents and local council to explore relocation options, and it is anticipated that this trend will continue as larger industrial tenants reach lease expiry,” Mr Lafferty explained.
Rental growth in the industrial market is forecast to remain stable in 2015, with increased momentum in the second half of 2015 expected to increase rents in 2016.
This rental performance will vary across capital cities, with Sydney expected to record rental growth earlier, while Brisbane and Adelaide are unlikely to see upward movement until 2017.
CBRE NSW State Director, Industrial & Logistics Services, Michael O’Neill said Sydney leasing activity was up by 61 per cent this year, relative to the corresponding period in 2014.
He noted that low supply would help drive Sydney rental growth, with the new wave of speculative development not expected until next year.
“Demand will continue to outweigh supply in the Sydney market, underpinned by a several factors including residential encroachments and the recent hailstorms, which displaced a range of tenants and soaked up a considerable amount of vacant stock,” Mr O’Neill said.
The report shows New South Wales’ industrial supply is at its lowest level since 2010, with just 377,000sqm forecast for completion in 2015.
Development activity is expected to pick up in 2018, with the Moorebank intermodal facility to deliver 850,000sqm of integrated warehousing by 2027.
While super prime, prime and secondary net rents remained unchanged over the quarter, high-tech and strata net face rents increased 1.4 per cent and 1.6 per cent respectively.
There were 10 transactions totalling $171 million in Q2, with one foreign investment deal comprising Investec’s acquisition of 66 Glendenning Road for $19 million.
Melbourne’s industrial market is tipped to experience a shift in tenant sentiment, with current and earmarked infrastructure projects having the potential to spur relocations across Melbourne’s western, northern and south-eastern industrial markets.
“Previously, tenants have remained loyal to their respective regions, however, the lure of improved infrastructure, as a result of major projects, will be likely to encourage relocations,” Mr Lafferty explained.
“The M80 ring road will improve access from the north to the south east region, while the Western Distributor will improve access to the Port of Melbourne, Swanson Dock and the Melbourne CBD.”
The report shows occupier demand strengthened over the quarter, with 180,000sqm of leasing transactions completed over the period. Distribution and warehousing continues to be the main occupier driving industry, alongside 3PL.
Investment activity gained momentum in Q2, with sales increasing to $227.4 million, lifting total sales for the year to $346.9 million.
Brisbane welcomed approximately 65,000sqm of new supply in Q2 across five projects, with the distribution warehouses at Freight Street, Lytton, the largest contribution -comprising more than 40,000sqm.
The supply pipeline remains strong for the remainder of the year, with 376,000sqm due for completion by December.
Just over $123 million in industrial sales transacted over the quarter, bringing the year’s total to date to $175.9 million.
After significant yield compression over the past 12 months, yields have stablilised with super prime remaining at 6.50 per cent, prime at 7.43 per cent and secondary at 8.77 per cent.
Mr Lafferty said sales to be finalised in the second half of the year would give a better indication as to whether further yield compression was likely.
The industrial market sentiment has softened in line with the transitioning resources sector, with few occupiers with space expansion requirements in the market.
Mr Lafferty commented: “Consolidation is the main driver behind current demand, with many occupiers looking to cut costs long term and increase efficiency.”
Rents declined over Q2 in all areas across Perth, with prime rents in the east and south decreasing by 6.3 per cent to $112 per square metre since June 2014, while rents in the north fell by 5.3 per cent to $107 per square metre over the same period.
The supply pipeline in Perth remains subdued, with 101,000sqm forecast for supply in 2015, albeit almost double the amount delivered in 2014 (49,000sqm).
Assets due for completion over the next 12 months include the Aldi distribution centre in Jandakot (48,900sqm), the Hitachi headquarters in Forrestdale (26,600sqm) and Komatsu’s distribution centre in Welshpool (23,500sqm).
Perth’s industrial market experienced modest yield compression over the quarter, driven largely by the low interest rate environment.
Despite subdued economic conditions in Adelaide, residential development opportunities are driving growth in the industrial market.
“This residential development activity is likely to be concentrated in existing industrial areas such as Brompton, Woodville and Elizabeth that tend to be predominantly secondary stock,” Mr Lafferty said.
“With minimal occupier demand for this type of property, it is unlikely that this stock would be absorbed for industrial use.”
Industrial sales activity in Adelaide has gained momentum over the past 18 months, with five warehouses changing hands with vacant possession.
“These sales are off the back of strong owner-occupier market over the past 12 months, with occupiers taking advantage of cheaper debt to purchase their existing facilities,” Mr Lafferty added.
The strong level of residential building activity, as a result of the government’s land release program, is beginning to slow down and could provide some headwinds to the industrial market.
Two industrial developments are due for completion in Q3, including the refurbishment of the Recall storage warehouse (15,900sqm) and the National mail and marketing warehouse (4,000sqm).
Rental growth remained subdued during Q2, with Mitchell the only precinct to experience growth. Mitchell prime net face rents increased 5.3 per cent to $99 per square metre, while secondary face rents lifted 6.3 per cent to $84 per square metre.
“Mitchell is the only light industrial precinct in north Canberra and has benefitted from the rapid suburbanisation of Gungahlin. Take-up has primarily come from builders, tradesmen and logistic service providers servicing the growth population base,” Mr Lafferty explained.