To say events unfolding over the past few weeks were ‘significant’ would be a monumental understatement.
While there’s unease on many levels, I’ll restrict myself to comments on how the current state of play will affect our nation’s industrial markets in 2022.
The industrial sector has been a superstar across the nation since mid-2020. Supply line issues throughout the pandemic saw strong performance in cold storage, temperature-controlled, 3PL (3rd Party Logistics) facilities and storage assets. With online shopping growing over the past 18 months to record highs, these types of assets will be of significant utility as e-commerce continues to be the consumers’ first choice for shopping.
The upshot has been increased demand for industrial space, with compressed yields, stronger rents and lower vacancies the result – particularly throughout 2021. For those of us who were around in 2007, the leasing take-up in Brisbane over the past six to nine months has been reportedly similar.
The big question is if the momentum be sustained as we enter the new year? While the industrial property sector might feel like an unstoppable force at present, history tells us that no market can continue to rise indefinitely. Market forces will eventually come into play.
WHAT’S NEXT FOR INDUSTRIAL PROPERTY IN 2022?
So, what will be the big influences on our sector in 2022?
There’s, of course, an interesting discussion around interest rate rises and whether this might hit industrial property investment. I have no doubt some investors will be increasingly coy about their returns when rates rise, but the underlying fundamentals for industrial remain strong. Substantive falls in property values in response to increased interest rates are unlikely, but market activity could certainly ease off from its heady highs, with yields stabilising closer to current levels.
I also think some types of industrial property will perform far better than others. The market – both for rentals and investment – will simply be more discerning in 2022. For example, the Ukraine conflict has resulted in fuel price increases, and that’s one input which will hit suppliers hard. Approximately 35% of freight is transported by trucks, making this cost a huge impost on operators.
As such, those facilities closer to population centres should benefit. If businesses can reduce the cost of moving goods from their warehousing to their customer base by being physically closer to consumers, then they’ll be willing to pay a premium for that.
Therefore, infill style industrial should do well. Prime locations within easy reach of population centres should remain strong. Even better if they have easy access to major transport corridors. These properties can expect rents to rise and yields to hold firm.
The other matter worth factoring in is the continued scarcity of good, developable industrial land. There’s simply too little land to satisfy current demand. Land take-up in the past 12 months has been extremely strong, as has price growth with some locations achieving eye-watering rates per square metre. This story is evident across all major cities and regions.
But look at that in conjunction with the other big constraint – the one around construction – and you can see why I remain reasonably bullish about industrial in 2022. Securing a reputable builder, acquiring materials and employing skilled labour for any development at present is a struggle. So long as this is the case, I feel demand will continue to outstrip supply in the sector. That is of course if you can make these projects feasible.
With land values at their current level and construction costs extremely volatile, this remains to be seen. What I am certain of is that with these two pieces of the construction pie challenging the feasibility of projects, we are likely to see a third piece – rents – experience a long-awaited increase.
So, while the overall view is that markets maybe a little more challenged in 2022, well-chosen assets will continue to be a savvy investment.
INDUSTRIAL AND LOGISTICS TRENDS
Rising fuel prices to drive infill demand
- Rising fuel prices resulting from the Ukraine conflict are hitting suppliers, with about 35% of freight transported by trucks.
- Operators may look to relocate their facilities closer to population centres to reduce the cost of delivering goods.
- To be physically closer to consumers, operators will be willing to pay a premium.
- Demand for infill-style industrial property should benefit and investors can expect rents to rise and yields to hold firm.
Industrial land scarcity and construction shortages
- Land take-up and price growth across all major cities and regions has been extremely strong over the past 12 months.
- Construction costs continue to rise due to shortages in construction materials and skilled labour for industrial developments.
- The land shortages and volatile construction costs mean demand will continue to outstrip supply, which may lead to a long-awaited increase in rents.
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