Cushman & Wakefield have released their third quarter industrial market wrap across Brisbane, Melbourne and Sydney.
East Coast industrial markets put on a mixed performance but strong investment and occupier demand combined with limited stock availability is continuing to underpin market fundamentals, along with lower investment volumes especially in Brisbane and Melbourne.
Sydney and Melbourne growth moderated from strong gains in 2016, while Canberra and Brisbane are "picking up pace".
According to Cushman & Wakefield's Tim Molchanoff, "a different picture is starting to emerge compared to 6 months ago.”
Key highlights in the main markets are:
Sydney Industrial Market
Western Sydney Airport drawing attention
Land owners are the immediate benefactors from the federal government’s decision to fund construction of the Western Sydney Airport. Despite rezoning uncertainties, institutional investor demand for development opportunities has increased vacant land values in the outer west market, which are up approximately 30 per cent year-on-year. Over the coming months, institutional investors are expected to remain active purchasers.
Rezoning opportunities in South Sydney
Recent rezoning opportunities in the South Sydney industrial market have produced strong financial outcomes for some owners. Sales evidence has highlighted purchases by residential developers at rates of up to double the capital value of industrial stock. For existing owners, such rezoning opportunities may prove too attractive to forego, potentially leading to further sales and residential encroachment on industrial stock.
Firm fundamentals drive occupier demand
Strong economic fundamentals have continued to drive occupier demand for industrial premises. In South Sydney competition for larger secondary grade stock supported rental growth of 9 per cent year-on-year, and face rents now average $120 per sq m. In the tightly held Central West, sustained tenant demand for smaller prime grade stock has pushed face rents to average around $135 per square metres, reflecting 4.5 per cent growth quarter-on-quarter.
Melbourne Industrial Market
Suitable market opportunities; strong prime rent growth in east & south east
Melbourne’s industrial leasing market has witnessed increased occupier demand, with tenants committing to speculatively built facilities. Logistics and wholesale trade industries are driving the market. Competition has been strongest in the city’s East and South East markets, which has resulted in prime rental growth of approximately 6 per cent year-on-year. Average prime net face rents in these locations now range between $80 and $90 per square metres.
Investment appetite remains firm
The lack of high quality, on-market opportunities continues to be an issue, resulting in total investment volume declining 44 per cent quarter-on-quarter to $249m. The south east and West markets were most active, contributing equally to a total of $231m. Institutional investors accounted for 58 per cent of total volume, assisted largely by Mirvac and Morgan Stanley’s partnership acquisition of a two asset portfolio in the West for $65.5m. Competition to secure quality stock has seen average prime yields compress across all submarkets, with the greatest movement of up to 50bps in the East and South East.
Lack of opportunity driving capital values
Overall, the Melbourne investment market is becoming quite tight, characterised by limited opportunities for standing assets as well as brownfield and greenfield sites. As such, capital values have continued to climb, with all markets seeing an increase over the past year. Growth has been strongest in the south east and west markets, though the latter has come off a lower base.
Brisbane Industrial Market
Tenant demand improving, but rents remain flat
After a comparatively slow start to the year, Brisbane’s industrial market has seen an increase in tenant enquiries, which has flowed through to improved occupier demand. However, rents have continued to track sideways, and incentives remain a significant component in lease negotiations as tenants seek to offset relocation costs. As such, prime rents broadly range between $100 and $135 per sq m, with rents a little lower for smaller premises in the M1 Corridor.
Investors compete for limited quality stock
Brisbane’s industrial investment market continues to be challenged by limited on-market opportunities for quality stock. A total of $150m was invested in Q3, representing a decline of 61 per cent q-o-q. However, purchasers are still active and competing for assets, which has seen further modest yield compression across most precincts. Average prime yields now sit between 6.75 per cent and 7.25 per cent.
Institutional platforms in search of vacant land
Given the limited investment opportunities for high-quality standing assets, some institutional investors are shifting their focus to land purchases. Goodman recently purchased 42-52 Export Street, Lytton, in the TradeCoast precinct for $8.2 million, at an approximate rate of $310 per square metres to speculatively construct a 16,000 square metres logistics facility.
[Related reading: Queensland’s MarketPlace Warner Sells In Record Deal]
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