Industrial property, is it still worth investing?

In recent years, the industrial property market in Australia has experienced a significant surge in demand. This growth has been particularly notable in regional areas such as Newcastle and the Hunter, which have attracted developers seeking opportunities with better value for money and lower land costs, as well as investors in search of higher returns compared to assets in major cities. During the 2022/2023 fiscal year, land values in prime industrial areas within the Newcastle region experienced substantial increases, signalling a buoyant market. This is evident from the completion of over 100,000sqm of industrial space, largely driven by the following factors: 

Development for pre-committed tenants: Many developers are constructing industrial buildings specifically tailored to meet the needs of pre-committed tenants. This approach minimises vacancy risks and ensures a steady rental income stream. 

Speculative development: Speculative developers are taking advantage of low vacancy rates (below 3% in most prime markets) and continued strong demand from tenants by constructing industrial buildings on speculation. This proactive approach anticipates future demand and aims to capture potential tenants in a competitive market. 

Industrial strata units: Developers are focusing on building industrial strata units, which offer smaller individual units within a larger industrial complex. This appeals to a range of businesses seeking flexible and affordable spaces, driving demand for such properties. With these factors in mind, let's explore five key drivers that continue to fuel growth in the industrial property market, reinforcing its investment potential for the upcoming financial year. 

Five factors influencing industrial property 

External factors impact the demand for industrial properties, just like any other asset class. These factors include the state of the economy, supply and demand, population and employment changes, interest rates and borrowing costs, material and labour expenses, infrastructure development and rental property yields. In the industrial property sector, five key factors have been driving demand: 

1. Ecommerce and online shopping 

Australia, like many overseas countries, is seeing an increase in ecommerce and online shopping as traditional retailers adapt to a digital landscape and require large warehouses and distribution centres for storage. This trend is also being seen in Newcastle and the Hunter region, where several new warehouses and distribution centres are being developed to accommodate this rising demand. 

2. The pandemic 

The need for storage was further exacerbated by the pandemic. In addition to retailers needing to find additional storage space as consumers moved online during lockdowns, many business reconsidered their reliance on overseas manufacturing and sourcing, leading to reshoring and supply chain diversification. This shift has driven further demand for industrial property as companies have established local production facilities, distribution networks and storage capacities in an effort to reduce reliance on international suppliers. 

3. New infrastructure and industrial development 

The Australian government continues to invest heavily in infrastructure such as road and rail upgrades, new ports and airport expansions which creates further opportunities for industrial property development.  In Newcastle, a new container terminal for the port and the upgrade of Williamtown Airport to code E status to allow international flights are just two developments taking place, resulting in a need for more industrial storage and distribution space. New infrastructure in Newcastle and the Hunter is also being developed by mining operations who operate in the region, the renewable energy sector, health and fitness businesses and manufacturing, construction and trade organisations. However, rising construction costs and supply chain issues for building materials have resulted in delays to the completion some projects across Australian and in our region, adding pressure on supply. The latest indicators from Macquarie Bank are that construction material costs have now settled back into their pre-COVID levels, helping to keep future industrial projects from experiencing these same building material cost pressures. 

4. Supply and demand 

Industrial vacancy rates are at their tightest across Australia as demand outpaces supply. While this eased in early 2023 thanks to lockdown periods ceasing and some projects being completed, many of the newly finished projects are already filled from pre-commitments. As a result vacancy rates will remain tight as demand for warehouse and distribution spaces continues.  

5. Rental prices and yields 

Strong demand and low vacancy rates are having an impact on industrial rents. In Sydney and Melbourne, industrial rents were up 30 and 20 per cent respectively to last October, while in east coast regional markets prime rents were up 9.6 per cent. In Newcastle, the average rental rate for a modern 1,000sqm site is currently approximately $160 to $180 per sqm per annum, while new developments are expected to exceed $200 per sqm per annum net plus GST within the next six months. Given the increased demand for industrial property combined with increasing interest rates, industrial property yields have fallen across the country. However, regional markets are better placed to weather the increase in interest rates given their higher yield spread than capital city markets.  

What does this mean for investors looking to buy industrial property? 

Demand for industrial property will remain high throughout the remainder of 2023 and into 2024. With continued shortages in vacancies, investors can be assured they’ll be able to secure tenancy should they purchase an industrial property to lease. Regional markets such as Newcastle offer investors a more affordable entry point than many capital cities and higher yields to combat increasing interest rates, providing investors with greater security. Regional areas have also seen population increases as the trend to move out of the cities continues, leading to continued infrastructure building required to cater for rising demand. 

Research is key to making an informed decision when purchasing an industrial property. Commercial Collective’s five handy tips for investing in commercial real estate can help with this process.