Rising industrial property costs not a zero-sum game for occupiers: Nathan Bingham

EXPERT OBSERVER

The changed retail and consumer landscape are driving the boom in the industrial property market. This uprise of activity is resulting in higher property costs for occupiers, however these rising costs will not be a zero-sum game for occupiers. Occupants who are seeking efficiencies within their supply chains will thrive.

The convergence of several influential factors, including the rapid growth in e-commerce and the need to service customers directly, has led to unprecedented levels of heightened activity in the industrial property market. It is forecasted that the market will grow 30-40% per annum for the next three years, according to research by TM Insight, Australia’s leading consultancy to corporate occupiers within the sector. This growth is likely to result in dramatic increases in property values and rents.

Currently online retail sales in Australia accounts for 7.5% of total retail spend and this is predicted to increase by 30% in 2022. This transition in the retail landscape includes grocery, food and beverage, pharmaceutical and FMCG. This is forcing significant change within the entre retail ecosystem to adapt to evolving consumer demand and most importantly be able to service the customer directly. For brands to bypass the traditional bricks and mortar retail stores it requires a complete transformation in their supply chain design and operation. 

Occupiers need property solutions which are built to service direct to customer demand, however there is a significant undersupply of suitable property. TM Insight is currently managing requirements for clients across Australia totalling in excess of 600,000m2 and is in discussions with organisations for a further 500,000m2 of new space. This is leading to a proliferation of greenfield development and the repurposing of antiquated existing property in locations close to where people live.

The sheer demand in industrial property is placing significant pressure on land supply, particularly in Sydney and Melbourne’s south east where land prices have soared over the past 18 months. Even Melbourne’s west which has had no rental growth for 15 years, is increasing. With rising land values and tightening supply, the increases in rents is likely to continue with a downward pressure on occupant incentives. 

Investment yields are at record low levels, and it is hard to imagine any further significant levels of yield compression to prevent cost increases at a real estate level for occupiers along the Eastern Seaboard. While at face value this appears to be good news for property owners and bad news for occupiers, that is not necessarily the case. The current retail landscape and increase in property costs is forcing occupiers to innovate and look upstream in their supply chains to operate far more efficiently and potentially reduce their physical footprint in Australia.  

In order to service customers directly, companies must create efficient supply chains. Many occupiers are managing ever increasing exposure to costs and demands from customers by investing considerable capital into purpose-built warehouses and fully automated supply chains. In some instances, investment levels in automation and purpose-built facilites in excess of $300 million are showing returns on investment in as little as 3 years when compared to current people-intensive methods of operation. Additionally, developers are taking on an active role in the financing of automation and other bespoke tenant elements helping occupiers become far more efficient in the way they operate. 

These changes in industrial property through a focus on efficiencies will create substantial operational savings. This means occupiers will be able to absorb higher property costs when they are considered in the full spectrum of costs from an optimised business case. Additionally, these efficiencies driven by automated and advanced warehouses may lend occupants the ability to work their inventory in smaller spaces and ultimately reduce their footprint. 

Under the rising costs of industrial property, companies will continue to thrive if they optimise their entire supply chain network. However, a company approaching their distribution network with a fragmented property-driven approach will fall victim to rising rents. 

At TM Insight, we have recently assisted with the investigation and implementation of new highly advanced and efficient distribution networks across Australia for brands such as Kmart (5 new facilities and 230,000m2 of development), Bunnings (5 facilities and 190,000m2 of development), Fisher and Paykel (3 facilities and 33,000m2 of development) and PFD Food Services (4 facilities and 60,000m2 of development).

It would be a shame to let the fear of rising property costs prevent companies from exploring other opportunities that may significantly improve operations and lower costs. This isn’t a zero-sum game if occupants know how to leverage the market dynamics in their favour.

Nathan Bingham is the director of property at TM Insight.