Retailers and logistics businesses are tipped to optimise their supply chains throughout Australia in 2023 after the rapid uptake of industrial space in recent years.
Knight Frank Australia Chief Economist Ben Burston (pictured) told ANZPJ that warehouse tenants were shifting into a period of supply chain optimisation over expansion.
Burston said tenant demand was expected to remain robust, with occupiers looking to make strategic improvements and upgrades to their distribution networks rather than continuing to upscale.
“Some big players have already scaled up, so you can’t expect the same high levels of demand and take-up in the market year-on-year,” he said.
“There are probably still some tenants in the market that need to do that, but we’re shifting to a period of supply chain optimisation rather than expansion.”
This supply chain optimisation was expected to influence cost, location, design, operational and environmental considerations, making warehousing more real-time tracked, physically distributed and flexible than ever.
The shift comes after a year of conflicting signals in Australia’s industrial market.
Burston said we were in the midst of a repricing in property markets in Australia and around the world.
The rise in inflation and interest rates has had a negative impact on property values and seen yields move out, he said.
“We’ve got higher funding costs that are putting pressure on property values and it’s putting pressure on for tenants too,” he said.
“So how do you best perform in that market? Well from an investor’s perspective, it’s about identifying opportunities for income growth.”
Burston said lease structures that were indexed to inflation were supporting income growth, given the volatility with inflation at the moment.
“In the industrial sector, we’ve seen incredibly strong rent growth this year which has been strong enough to offset the negative signal coming out of higher interest rates and high funding costs,” he said.
Tight supply has driven rental growth, with Australia recording the world’s lowest warehouse vacancy rates.
“We’ve been seeing a gradual pickup in development activity over the past few years, but demand has run ahead of it so far,” he said.
“We’ve got this structural supply shortage that will be very difficult to address in the near term and that’s driving those rent costs up.
“We’ve been caught short in terms of the amount of available space, but also the amount of immediately developable land for industrial.”
Knight Frank expected a significant year for development completions in 2023, led by Brisbane and Melbourne.
Yet even this new supply was unlikely to restore the supply and demand balance, meaning further rental uplift was expected next year albeit at a slower pace than this year.
Sydney, the country’s tightest capital city industrial market, was expected to see much more developable land become available by 2025.
The lack of developable land and the recent rent growth have prompted developers to revisit the idea of multi-level warehouses in select markets like Sydney.
Burston said developers needed the higher rent levels to make these projects viable.
“In south Sydney, we’re seeing more developers looking at it and putting together proposals for multi-level industrial,” he said.
Multi-level warehousing could help landlords and tenants maximise valuable land in sought-after infill, also known as last-mile, logistics locations.
Infill locations were typically closer to the end consumer, in contrast to the big distribution facilities that you could find in Sydney or Melbourne’s outer western suburbs.
Burston said infill logistics facilities would help retailers and logistics businesses optimise their supply chains, enabling faster delivery to urban locations.
He said multi-level industrial was challenging for developers, but the strong demand, rising rents and the recent tightening of supply across the board was pushing the market in that direction.
Read our other 2023 Australian Property Outlooks