A recovering state economy has driven Melbourne’s industrial property market to new highs, with market strength expected to continue throughout 2016, according to research from JLL.
Figures show the highest level of take-up ever recorded for the city’s industrial market, with a total of 731,000 sqm of space absorbed over 2015 (for transactions greater than 5,000 sqm). The market has already established its strength in 2016, with recorded take-up for the year’s first half at 377,000 sqm. Take-up is considered a reliable indicator of the strength of a property market.
Macroeconomic factors are behind the industrial market’s solid performance – Victoria’s economy is being driven by both population and job growth, as well as structural change in the automotive and broader manufacturing industry and their supply chains.
“To put the figures into context, Melbourne industrial markets have seen activity that is already well ahead of previous years, and are now leading the nation in terms of take-up relative to long term averages,” says Annabel McFarlane from JLL’s Strategic Research team in Australia. Take-up last year was the strongest since 2006.
A long-term view shows the logistics sector has taken the biggest leap forward over the past decade, with JLL’s research showing the ‘transport, postal and warehousing’ category accounted for 29 percent of total take-up in Melbourne’s industrial market over 2007-12, but rose to 35 percent of share over 2013-16.
The logistics sector’s strength can be attributed to a few major factors, says Matt Ellis, JLL Head of Industrial – Victoria– the sector’s confidence in the economy due to strong population growth and its flow-on effect for retail trade, and business structural change.
Outsourcing of logistics functions has also contributed to this result; Retailers have been reducing costs by increasing their supply chain efficiency, embarking on property partnerships with logistics companies.
“Logistics and distribution capabilities are increasingly being outsourced, and efficiencies are being sought through co-location to decrease overall occupier footprint as well as vehicle movements and the deployment of leading materials handling technology,” Ellis says.
“Transport companies like Toll and TNT are also looking for efficiencies, and second-tier groups are being lured to new premises,” which has supported the demand for space.
Take-up for most other sectors in Melbourne’s industrial market have remained reasonably static over the decade with the exception of retail, which rose from 21 percent of take-up share over 2007-12 to 23 percent over 2013-16, while wholesale trade moved from 5 percent to 7 percent of take-up share.
Although not a huge leap in percentage terms, the data shows a significant increase in the take-up of space by retailers in raw terms. Prior to 2012 retail trade averaged 109,000 sqm per annum take-up, which has grown to 143,400 sqm per annum in the past three years. Commitments to larger facilities in core distribution locations is behind this.
“Evidence of growth in the retail sector in recent years is illustrated by the large scale projects underway or completed for Target, Reject Shop, Ego Pharmaceuticals, Kathmandu, Spectrum Brands and Woolworths,” Ellis says.
JLL’s research shows the much-maligned manufacturing sector appears to be holding its own, slipping slightly from 28 percent of market take-up share before 2012 to 27 percent in the past three years.
“Manufacturing is evolving as the sector shifts away from certain industry sectors and towards newer growing sectors,” says Ellis – the sector will feel the pain of the shutdown of Australia’s car manufacturing base, but has benefited from growth in the pharmaceuticals, cosmetics and prepared food segments, particularly in Melbourne’s south-east.
In addition, the structural change experienced by the sector has made it harder to define ‘manufacturing’ in some facilities, he says.
“The lines have become blurred in some deals, where distribution and manufacturing processes have merged,” Ellis explains.
While Melbourne’s industrial market has gathered strength in recent years, it is harder to predict how it will perform over the medium term.
“The last really strong growth period for Melbourne industrial was through 2004-07, and a lot of leases from that period are coming close to finalisation,” Ellis says. “Where typically institutional landlords would not like to provide significant incentives, they are now starting to realise some of these tenants may soon be on the move. I expect this will mean incentives remain broadly elevated, including for lease renewals on major expiries.”
Demand for big box retail has, to date, been driven by population and dwelling growth, but apartment construction is slowing, which may have a flow-on effect for retail spending and, in turn, the logistics sector.
On the upside, however, opportunities for urban renewal in suburbs like Clayton and Bayswater are emerging, as manufacturers in these areas have moved to larger, co-located facilities elsewhere – and this is allowing institutional investors to enter this part of the market, Ellis says.
Head of Industrial, Victoria, JLL