Industrial precincts in demand as local businesses shift gears

15 June 2022

By Kirsten Craze

Since the pandemic hit, Australian real estate has been tracking at different speeds - a skyrocketing residential market and a rollercoaster ride in the commercial space. While the office slice of the property pie is still adjusting to the wave of remote and hybrid working, another segment of commercial real estate is heating up.

Industrial precincts are hot property today as businesses adapt to supply chain challenges and recruitment issues.

According to Westpac’s 2022 Outlook for Industrial and Logistics Commercial Real Estate report, the domain is running “red hot”. In addition to changes in consumer behaviour pushing retail online and supply chain problems holding up stock, social distancing has led to a greater use of automation.

“These changes are transforming the global logistics landscape and will contribute to ongoing strong demand for industrial property over the next few years. A lot of this demand has been driven by investors who have become increasingly involved in the sector in recent years. However, more recently there is booming owner-occupier demand from businesses,” the report said.

In 2021 alone, 4.7 million square metres of industrial and logistics space was leased across the country – an 80 per cent increase on the 10-year average.

Hayden Bennett, Managing Director of Commercial Property Group and Committee Member of REINSW’s Commercial Chapter, said the sector presented an incredible opportunity to buyers, investors and agencies who were considering expanding into the category.

A race for space

As the construction industry hit overdrive during the past 18 months, Mr Bennett said ancillary companies have needed to expand their footprint.

“With construction taking off we've seen a lot of growth among building companies and developers, then that trickles right through the industry whether it's air conditioning installers, metal fabricators, plumbers, landscapers – all these businesses need more warehousing and logistics improvements.”

He described the flow on of the building boom as having a “massive domino effect” buoying up industrial precincts, particularly in well-placed locations close to the Sydney CBD and transport hubs.

“Office space has clearly seen somewhat of a contraction as businesses get rid of any redundant space to cut overheads. But warehousing on the other hand, no one's been downsizing their requirements, they’ve been upscaling to hold more stock and more inventory, and that increase is often sheerly from the fact that there's such heavy supply chain delays. They're ordering and holding more stock so they can get it out to the consumers more quickly.”

Demand beyond storage

While many companies are looking to hold onto more stock, Mr Bennett said demand goes beyond warehousing.

“There’s a large gamut of businesses that can go into an industrial building. It's every industry that can fit into a warehouse which doesn’t just mean product-based businesses. It also could be for gyms, rehabilitation centres, recreational facilities, showrooms - the places where people have a need for substantial floor space that they can't get in a traditional office or a retail shop.

These business owners are increasingly looking to industrial real estate to rent or buy a large lot with adequate parking so they can better accommodate their business and meet their community’s needs.”

Although not every type of business seeking square meterage can move into an industrial precinct due to zoning restrictions, many companies are re-imaging their offerings to suit changing consumer behaviour, particularly since the pandemic.

“A clothing brand can’t turn a warehouse into a retail shop, however a manufacturer could make their own garments and have a warehouse full of products they’re selling online through a click and collect style distribution. They might dedicate 20% of their floor space to a showroom where customers can buy directly from the warehouse. There are a variety of options available, which is what makes industrial property so versatile,” Mr Bennett said.

Industrial versus residential

An increasing number of investors who were previously dedicated to residential real estate, are turning to industrial property due to its long-term benefits, said Mr Bennett.

“The average lease is three years, but there could be five or seven-year leases an investor could acquire, and their tenant pays all outgoings on the property.

It means the landlord has no responsibility for maintenance and upkeep on the building and, unlike residential real estate, the investor isn’t getting phone calls saying the hot water system is broken or the stove needs to be replaced. Instead, it's monthly payments in advance and every year the rents are usually escalated by a negotiated percentage or the CPI,” he said.

The future looks bright

“Right now, industrial is the jewel in the commercial crown. If we look at commercial real estate, made up of retail, office, and industrial, then industrial is the hottest flavour for both owner occupiers and investors,” Mr Bennett explained.

Demand is outweighing supply and quality new industrial space is hard to come by.

“The sector has really exploded, and not just from owner-occupiers wanting to buy industrial warehouses but also from investors who have been attracted to the industrial market due to the sheer scarcity of it.”

Blue chip investments are proving to be those not necessarily providing large footprints but great locations and versatility, according to Mr Bennett.

“Occupiers and investors are being driven by proximity and are realising they're not making any more industrial land in Sydney metro because everything's being rezoned for residential redevelopment.

Businesses seeking industrial spaces often provide a lot of employment so the owners and management of these companies need to weigh up where they can be located and still attract and retain great staff. It’s a serious consideration for them.”

And, as land becomes rarer, ultimately industrial spaces are looking to take a new direction Mr Bennett said.

“We're seeing more of what we call vertical warehousing, where you’ve got multilevel warehouses at the same site. Years ago, industrial spaces would be built on a single level with no basement carpark and 7m or 8m clearance. Now, in some industrial areas, you can build up to 16m high which allows for multilevel warehousing where the floor space ratio is more attractive to investors who are also seeking city-fringe locations.”

If you are interested in joining REINSW’s Commercial Chapter, contact our Membership team today at [email protected].

Want more?