Rising fuel prices are set to drive significant rental growth in industrial and logistics infill markets across Australia over the next five years, as operators look for more central locations.
“From a logistics perspective, the benefits of positioning products close to demand (higher population density locations) can translate into significant savings in transportation costs, which can count for up to 50% of the overall supply chain cost (of which fuel is the largest contributor at around 30%),” Colliers Managing Director of Industrial Gavin Bishop said.
The comments follow rising fuel prices, with the average price of petrol and diesel increasing to $2.30 a litre in some cases.
With trucks carrying about 35% of goods and freight, Colliers suggested that occupiers that positioned stock closer to end consumers could cut down transport costs, which could offset the higher warehouse rents paid for infill markets compared to cheaper outer ring industrial precincts.
“As a result, we expect that logistics operators will increasingly prioritise their geographic footprint over rental costs,” Bishop said.
Industrial and logistics infill vs outer ring annual prime rental growth (source: Colliers)
The trend could drive significant rental growth for infill markets over the next five years, as industrial occupiers looked to strengthen their position in those markets.
Infill markets such as Milperra in Sydney’s inner southwest have already seen increased demand for warehouse space from transport and logistics operators.
Rents in infill markets along the East Coast have outperformed outer ring locations with prime growth of almost 9% recorded in 2021, compared to 4.5% for outer ring submarkets over the same period.
“In our view, we are bullish on the rental growth prospects for infill markets, and significant rental growth is forecast over the next five years which follows an extended period of very modest growth,” Colliers Director of Research Luke Crawford said.
“While yield compression has provided the backbone for growth in asset values in recent years, growth going forward will be further underpinned by the pick-up in rents, particularly given the potential headwinds around higher funding costs.”
Colliers said the current problem with infill markets was a lack of leasing supply, in addition to most stock often being older and unsuited to the needs of modern occupiers.
However, several major institutions such as Gateway, ESR, Halecap, Stockland, Centuria, Logos and Nashcap have been actively targeting these infill precincts for re-positioning and redevelopment opportunities.
“Institutional ownership in infill markets is expected to increase substantially over the next five years as private and owner occupiers take advantage of current pricing within the sector,” Bishop said.
“In turn, this will spur on new development within these land-constrained markets, which will benefit occupiers looking to cut their transport costs and enable new levels of supply chain efficiencies by occupying space in these locations.”