As demand outstrips supply in Sydney’s West, industrial warehouses are increasingly being built without pre-commitments from tenants.
It is the first time since 2007 that this volume of speculative development has come to market.
In one of Australia’s fastest-growing sectors, historic low vacancy combined with increasing rents and pent-up demand – especially from third party logistics providers and online retailers – is giving investors the confidence to build first and then seek out tenants.
Given current market conditions, the chance of securing a tenant before practical completion is as high as 80 percent, says Peter Blade, from JLL’s Western Sydney Industrial team.
A-Grade vacancy has fallen to one percent in Western Sydney, and “robust occupier demand will see the downward pressure on vacancy remain”, he adds.
As private investment follows government-backed infrastructure, more and more companies are clamouring for locations by the Moorebank intermodal terminal along the M4/M7 corridor.
A Deloitte paper entitled ‘Western Sydney – Australia’s development site’ describes the economic journey of the region as having moved from “ambitious concepts to more practical plans.”
Major real estate investors including Goodman, Dexus, Logos, GPT and Charter Hall are already heavily bought-into Western Sydney, as are many smaller domestic investors backed by big overseas funds.
Goodman chief executive Greg Goodman told the Sydney Morning Herald the company had spent “years” acquiring land in strategic locations, anticipating “rising demand from e-servicing companies over the next five to 10 years”.
Investment allocations towards the industrial sector have rocketed, says Blade.
“The underlying demand for industrial logistics assets in Australia has shifted; distribution centres are among the best risk-adjusted real estate performers.”
Increased demand has seen A-Grade net rental increases of 5.5 percent in Sydney’s outer west, and 5.4 percent in the south west, since January 2017, reflecting an average rent of A$118 per-square metre and A$111 per square metre respectively.
While industrial zones in Sydney’s south and north west have experienced greater rental growth since January 2017 (6.8 percent and 6.7 percent respectively), these are exceptionally tightly-held markets, with industrial developers competing with office and residential developers for space.
Supply is expected to shift increasingly to the west where larger requirements can be met. The 33km motorway link, West Connex, due in early 2019, will further enhance the area’s desirability.
There is currently 213,000 square metres of speculative development under construction across the outer west and south west precincts.
However, the success of leasing the growing crop of speculative properties will be highly subject to whether they meet the adaptive and sustainability requirements of tenants, says Blade.
“We are seeing a lot more innovation and design going into new stock, and this is being driven purely by the tenant. A lot of them want heavier-duty concrete floors so they can move to automation if they need to.”
Sustainability features such as water recycling, solar energy and LED lighting have become the new imperative for major tenants, Blade adds.
Click to read about how multi-level industrial is taking off in Australia.