Industrial property has remained one of few real estate sector winners to have successfully weathered the economic impacts of the global pandemic. The volume of industrial space leased in Australia lifted to a five-year high in the second quarter of the year.
Like so many sectors of the economy, the last few months hasn’t been easy on most real estate categories and not everyone is doing as well as industrial property. Any sector that depends on close interaction between people has been hugely impacted. It is still uncertain if some industries will ever fully recover. This is bound to put further pressure on physical stores, with vacancies expected to increase and rents forecast to fall 20% for discretionary shopping centres. Similarly, office rentals predicted to continue to experience an increase in vacancies and pressure on rental returns, putting a question mark over the short to medium investment prospects for this real estate category.
These changes have also created new investment opportunities, mainly with respect to logistics. This highlights the growing importance of warehouses, which form part of the supply chain for online retail or are relied on heavily by some building sectors for storage.
Over the next decade an estimated $83 billion will be spent on transport infrastructure across Victoria. The state already has over $37 billion worth of projects underway or committed. There is a further $2.6 billion in building work packages that the government has promised will drive major infrastructure investment, as part of the state’s recovery from COVID-19.
This massive infrastructure spending commitment is leading to amplified demand for industrial leasing due to the increased requirements coming through for scaffolding, cranes, industrial cleaning, equipment hire, concreting and demolition firms. Consequently, these firms to need larger warehouses, with increasingly better storage capabilities.
With a range of government infrastructure projects to continue, even if at a smaller capacity during stage 4 lockdowns in Victoria, there seems to be no sign that the need for such supplies will slow down anytime soon. In the post-COVID economy, this demand is expected to continue and even increase – a positive for the industrial real estate sector.
Unsurprisingly, Victoria isn’t the only state seeing such a pattern. There has been increased interest in Adelaide’s industrial market, which has previously been supported by significant government investment in infrastructure, as well as growth in e-commerce and transport logistics. Due to the current health crisis the focus for investors has become occupancy, tenure and covenant solvency for well-located, income producing industrial real estate. This has also played a part in Adelaide seeing increasing industrial demand as investors see the area as having lucrative and strong industrial opportunities.
It has been the consumer staples sector which has driven the stability of the industrial and logistics sectors during 2020, and the pipeline of infrastructure projects has continued to drive this demand. We expect that the commercial staples and infrastructure sectors will also continue to be long-term drivers of growth.
The demand from increased projects, mixed with the low interest rate environment and robust underlying fundamentals of the Australian industrial and logistics market, means that we can expect to continue seeing this substantial demand from investors domestically and internationally.