Industrial property vacancies continue to rise, but overall outlook promising: Knight Frank

Industrial property vacancies continue to rise, but overall outlook promising: Knight Frank
Jennifer DukeDecember 7, 2020

Industrial property’s total vacancies continues to increase, according to Knight Frank Research, with 2.17 million square metres on the eastern seaboard available.

For perspective, this is 29% higher than Knight Frank recorded 12 months ago in their Industrial Vacancy Analysis.

Much of this vacancy rise has been a result of Melbourne’s market – which has increased by 29%.

Knight Frank national director of Research & Consulting Matt Whitby said that rises have also been seen in Brisbane, and in Sydney, which has stopped an improvement previously being recorded.

“As at July 2014, the Melbourne industrial market continues to account for the highest proportion of east coast industrial vacancies with a 37% share of available space followed by Sydney which accounts for 36% of vacant space and Brisbane accounting for a share of 27%,” said Whitby.

“Although the level of prime grade industrial space across the Australian East Coast market remains marginally lower than secondary accommodation, the gap continues to narrow.”

Whitby also said that firm enquiry is still being seen for sub-2,000 square metre leasing options, and tenants are continuing to upgrade to prime industrial stock.

“This reaffirms the trend, in evidence since late 2013, where companies are increasingly making decisions for the longer term off the back of greater confidence levels, rather than taking short term space within secondary buildings as a hold over measure,” he said.

“With some further speculative supply in addition to several pending vacancies forecast to be added to the vacancy count in the October quarter, the market will be looking to an improvement in leasing absorption to prevent a further increase in the level of available space”.

Total vacancies of prime stock, as of July 2014, is at the highest level since the series began, and accounts for 49% of east coast vacancies, the report explains. This is 34% higher than just two years ago.

However, managing director of industrial Greg Russell said that it’s actually a promising outlook across the east, as tenant requirements begin to pick up.

“Not only is prime available industrial space well above the long term average, but speculative development (both completed and under construction) increased sharply over the past quarter, rising by 56% to total 277,452sqm and now accounts for 13% of all East Coast industrial available space,” said Russell.

Despite this, the pipeline of “speculative development” under construction has almost doubled over the past quarter and is at the highest level since the beginning of the series.

“More options continue to emerge for larger space users in Sydney, with 18 prime opportunities above 10,000sqm (compared to 14 last quarter), while 15 over 10,000sqm exist in Melbourne (down from 16 options), and there are nine prime vacancies above 8,000sqm in Brisbane (compared to eight last quarter),” he said.

In Sydney, CBRE research has suggested that a significant number of new developments will prove a positive for the industrial property market, with their 2014 Industrial MarketView Q2 report suggesting it will be a strong base.

They noted that by the close of 2014, 600,000 square metres of new supply over 5,000 square metres will be added to the market.

CBRE research manager Mark Lafferty has said that the scheduling of the projects would be a positive, but that there is uncertainty around the funding of some projects.

“As a result, the surrounding industrial markets are positioned to benefit from a lift in investor sentiment levels, as well as stronger demand for industrial space,” he said.

“The greatest additions of new supply are in Sydney’s outer west, where 58% of the 2014 supply pipeline is being delivered,” Lafferty said.

“Future supply is being built to best service the growing transport and logistics sector, with a focus on super prime logistics facilities that have sound accessibility to existing and planned transport infrastructure.”

Major projects include the $11.5 billion WestConnex project and the $3 billion FS-M2 tunnel link.

Sydney’s industrial sales activity also saw an uplift, with $395 million selling over the three month period – up 73% from the same quarter in 2013.

See over page for a state-by-state breakdown.

Turn to page three for information about industrial sector yields.


KNIGHT FRANK’S BRISBANE, MELBOURNBE, SYDNEY AND PERTH ROUND UP

Brisbane

  • Available space up to new highs over past quarter

  • Above-average take-up of space

Knight Frank managing director of industrial Greg Russell:

The take-up indicated that there is been a welcome return to the market of smaller to medium size tenants with ten of the 17 vacancies absorbed over the quarter under 5,000sqm, which is the lifeblood of much of the Brisbane market. At the same time, there is also strong demand at the larger end of the scale, which was dominated by retailing or logistics occupiers who are currently focused on newly built accommodation.

There has been good absorption of both speculatively developed and D&C offerings in recent months, and while this is a positive in terms of demand, the backfill space left by these larger tenants has been a factor in the vacancy increases.

Take-up was strongest in the South and South West markets, as the South saw significant take-up of secondary space and the South West saw solid absorption of prime assets, boosted by speculative construction in the region. Good take-up of speculatively developed space is expected to trigger more commencements in the South West, South and TradeCoast markets.

Sydney

  • Vacant property levels up 12.6% over the past quarter

  • Now at 770,014 square metres total vacant space

  • Increase in available speculative stock

Knight Frank managing director of Western Sydney Derek Erwin:

Gross take-up for the quarter to July measured 98,276sqm, which is 17% below the average level since the series began in 2011. Additionally, the absorption figure continues to be boosted by some vacant possession sales to owner occupiers. Absorption of prime stock has outpaced secondary by a factor of two to one over the past 12 months (excluding D&C’s).

Fifty-three per cent of take-up (excluding D&C’s) over the past 12 months has occurred in the Outer West, while additional deal activity in the region has also been achieved in the pre-lease market given land availability. It is noted, however, that land supply is expected to start seeing some of the pre-lease demand move into the North West and South West regions in the short to medium term.

Melbourne

  • Three months to July 2014 saw available industrial space increase by 10%

  • Total of vacant space now at 807,269 square metres

  • This is the highest level in almost five years

  • It’s 38% above the historical average

  • Take up has been stable for the past three quarters

  • Increase in available speculative stock

Knight Frank’s state industrial director Gab Pascuzzi:

The second quarter total take-up of 82,107sqm across eight buildings greater than 5,000sqm, remains 41% below the historic average of 138,961sqm. Notably, gross absorption recorded over the quarter was entirely within backfill space.

Speculative space under construction grew by 20,299sqm to reach 61,771sqm, 27% above its long term average. Four out of the seven projects currently under construction are located in the South East, while in contrast there are no speculative developments under construction in the West.

Perth

  • Over the quarter, available industrial space increased by 8%

  • Available space now totals 303,562 square metres

  • An influx of sub-lease space has entered the market, up 42% on last quarter

  • Sub-lease space available totals 69,776 square metres – 23% of the total

Knight Frank state industrial director Jarrad Grierson:

A growing number of vacancies has offset relatively strong leasing take-up over the three months to July 2014, as an increasing number of smaller secondary assets become available in the Perth Industrial market.

See over page for information about the leasing environment for the industrial sector.


New information from JLL has looked into the currently available yields for investors looking towards industrial property, noting that the stable fundamentals are attractive to many.

According to their quarterly research statistics, transaction volumes are indeed up 35% in the first half of 2014 compared to the same period in 2013, with almost $1.6 billion in industrial sales year-to-date 2014.

Melbourne and Sydney have led the sales activity in the second quarter of 2014. Construction wal also noted to be accelerating, with new supply to get to a record high since 2008 levels, and average rents to remain steady.

JLL head of industrial Michael Fenton said that investment activity is at present very solid, with capital allocation to the industrial sector exceeding available product by five times.

The average sale price in 2014 totals $18.4 million, with a $21 million record per sale set last year.

 “Our expectation is that vendors will increasingly be encouraged by price signals and the depth of capital evident in the market to selectively bring assets to the market to crystalize gains made over recent years or to exit underperforming assets,” said Fenton.

“Buyers remain led by the major and smaller domestic A-REITs and their managed funds, mid-tier boutique funds, syndicators and some high-net worth private investors.”

In the second half of 2014, the expectation is that larger offerings will see offshore interest, and Fenton predicts one or two new entrants without current exposure to Australian property.

Upcoming expectations include the first time that more supply has been completed in Brisbane than Sydney, and the first time since 2006 that Melbourne has overtaken Sydney.

Softer leasing is being experienced in Melbourne and Brisbane for both rental growth and market incentives.

Minimal evidence of rental growth over the past few quarters was recorded, with flat average face rents.

Jennifer Duke

Jennifer Duke was a property writer at Property Observer

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