M3 Property’s Matt Webb says industrial property deal activity is likely to increase after a quiet start to 2023, while industrial rental levels will continue to grow amid supply shortages.

Webb – who is Director of Industrial at M3 Property – discussed industrial occupier demand, supply levels, rents, deals, industry headwinds and tailwinds, and his outlook for the rest of the year on the Voice of Value podcast.

Read an edited preview of the interview below or listen to the podcast on your preferred podcast platform here.

How was industrial occupier demand in Australia in Q1 2023?

Webb: Demand for industrial space has been strong throughout the last couple of years, and that’s continued into Q1. So in 2023 we’re seeing continued economic growth, and really industrial demand is driven by GDP growth. It’s not so much population growth, like for example in residential. While the economy is still growing, people need to store more goods, more goods come in via the ports, and industrial demand keeps on increasing. Owner occupiers have been very active in the market compared to industrial investors that have pulled back a bit due to interest rate increases. We are seeing an increasing amount of transactions to owner occupiers and for the leasing demand, demand is still strong and that’s been shown in increasing rental levels as demand has outstripped supply in most Australian markets. The market is seeing shortages of industrial stock and therefore rents have increased and land values have continued to increase. For most Australian industrial markets, we’re seeing shortages of supply. Industrial land values have been increasing at a rapid rate in the last couple years.

Did we see much change in industrial rents in Q1?

Webb: Industrial rents were largely flat for many years, especially after the GFC and throughout the 2010s. Land values started moving in roughly 2016 and accelerated in 2019. There’s a lot of talk in the market that rents would need to follow, but for a number of years, very little activity occurred in terms of increases in rental values for industrial. However, the kickoff of COVID, which limited the supply of new sheds to the market, prompted a jump in rents. When COVID hit in early 2020, we wondered what was going to happen. I don’t think many would’ve predicted the result that the long awaited increases in rental levels would have occurred. So in the last couple years there’s been strong rental increases that have continued during Q1 of 2023 – it’s probably been the most active part of the industrial market. To be honest, during 2020 and ’21, it was fairly easy to be an industrial valuer because every time you opened up the database, there were three new sales in there and you knew exactly what yields were doing, and it made it fairly straightforward to put your valuations together. Right now, transaction levels for investment properties are significantly down from the peak. However, there’s still a lot of rental activity due to that occupier demand that we talked about earlier and due to the lack of supply, we’re still seeing significant increases in rental levels.

Listen to the full podcast here ⬇️

Can you elaborate further on industrial transaction activity?

Webb: Transaction volumes are down significantly from the peak of the market, which most people would either say was Q4 2021 or Q1 2023. The Melbourne market is especially quiet at the moment. When we look at investment transactions $20 million-plus in Melbourne in Q1, I struggle to think of any. There is some activity in the other markets and it’s ironic talking to our colleagues in Brisbane and Adelaide and have them talk about having more transactions to rely on than we do in Melbourne, where normally it’s the opposite way. There’s some transaction volume in Sydney as well, but transaction levels are well down for all types of transactions, particularly fund-grade investment product. We are seeing activity in the owner-occupier space. There was an $18 million owner-occupier transaction in Dandenong during the end of last year that you could count as Q1 2023 and that was quite a strong sale.

What about the headwinds and the tailwinds facing the industrial property market?

Webb: The main headwind – and perhaps the headwind that the whole economy is facing – is whether we end up in a recession at the end of this year or next year. There’s a lot of conflicting views, some people are optimistic, some people are pessimistic. I’m not an economist so I won’t have a guess, but occupier demand is largely driven by GDP growth. So while GDP is still growing, while the economy is still in a positive, there’ll be demand for industrial space and then the market will at least be stable. If Australia was to fall into a recession towards the end of the year, well that changes the story.

Another headwind is the lack of available supply and that is driving growth in land values and rents. It’s interesting talking to developers and talking about their feasibilities. They’ve purchased land at quite strong values and are looking to develop and the feasibilities weren’t really working for them for a while because the rental levels didn’t compensate for the value of the land and, of course, the increasing construction costs. But as rentals have jumped, then the feasibility works again because their gross realisation, their top line of their feasibility, gets a lot stronger. So in terms of a tailwind, the rental growth will help push more supply onto the market and that will perhaps ease that rental growth conversely.

What’s your outlook for Q2 and the rest of this year?

Webb: In terms of values, the big question in the industrial market is where capitalisation rates are sitting. As we say, we’ve had a significant decline in transaction levels and valuers love sales because they help justify what cap rates we adopt in our methods. I was up in Sydney recently talking to clients and there were some complaints that funds were ordering valuations from different valuers and different cap rates were coming back. Obviously consistency is ideal, but I don’t think anyone can be blamed in the current market when there aren’t the transactions to really narrow down the range that should be applicable for your cap rate. So there is a lot of talk in the market that transaction levels will increase as the year progresses.

Funds and market participants have held back as interest rates have increased, but eventually something has to give. People may have to deploy capital or owner occupiers will have to move, or some other impetus for transactions that can only be delayed for so long. So there’s some talk that in Q2 or Q3, we’ll see increased transaction levels and that should provide more certainty at where cap rates and values are at because there’s a lot of valuation uncertainty in the market now. Conversely, we would expect rental levels to continue to increase throughout the year, as long as we don’t end up in a recession. Industrial demand will continue to increase and rents will have to respond because the supply is just not there.

As long as demand continues to increase, we would expect land values to continue to increase, although perhaps a little bit slower than they have over the last couple years. So throughout this year, we’re hoping to see increased transaction levels to provide us the data that us valuers require. It will be interesting to see exactly where value levels and market yields sit once we have some transactions. To be honest, if you had said at the start of last year that interest rate increases were coming and asked what that was going to do to market yields, I would have expected them to move more than they have. So the market has held up quite well, albeit on limited transactions. Yes, yields have moved out a little, but not as much as I would have expected. It’s interesting that there have been values that have been fully compensated by rental increases. While you might have yields easing a little bit, rents have gone up by more and capital values have held or even slightly increased in some circumstances. So further in 2023, we will see if that story still holds.


The Voice of Value is a podcast series about Australia’s property industry. Powered by the Australian Property Institute, this series features in-depth conversations with Australia’s property leaders about their careers and passions, as well deep dives into different property markets. 


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