Fab Dalfonso, National Director of Sydney South West Industrial, Catherine Allotta, Associate Director of Colliers Valuation and Advisory Services, and David Hall, National Director of Colliers Sydney West Industrial.
Off the back of a strong year in 2021, Colliers Industrial property experts share their thoughts with MHD on the future of industrial property in 2022 and beyond.
The fundamentals within the industrial and logistics sector in 2022 will remain supportive of strong market conditions. E-commerce is forecasted to continue to provide the backbone of tenant demand, while we are currently undergoing an era of transformation and renewal as a result of the significant investment in infrastructure. which will support new development. It’s Colliers’ view that we see the future of the Industrial and Logistics sector looking bright.
Our Colliers Industrial experts have explored the underlying factors within each area of our service expertise that we know to be shaping the Industrial and logistics landscape. Our experts discuss factors impacting demand, growth of the Western Sydney market, the rise of the truck driver, NABERS (National Australian Built Environment Rating System) in industrial and making your warehouse space count.
FACTORS IMPACTING DEMAND
Catherine Allotta, Associate Director of Colliers Valuation and Advisory Services, believes from a valuation perspective, prime industrial grade assets with strong tenant covenants and lengthy WALEs that are situated in good locations are in high demand by investors in today’s market. Similarly, for the occupier market, demand is being led from the e-commerce, transport and logistics, manufacturing, pharmaceutical and cold store sectors.
“Since Q1 2021, we have witnessed yield compression of up to 100 basis points (bps),” Catherine says. “For the East Coast capital cities, prime yields currently average 3.91 per cent while selected submarkets sit closer to the 3.25-3.50 per cent range.”
Internal rates of return (IRRs) have also compressed from 25bps to 50bps to now average 5.25-5.50 per cent. This in turn has created a significant uplift in adopted values from circa 10.00 per cent to 20.00 per cent.
Scarcity of industrial zoned land has seen rates for greenfield sites escalate to above $1000 per square metre. The need for last mile logistics facilities located in proximity to the end consumer created a flurry of activity in the second half of 2021 and we expect to see this trend continue in 2022 with rates increasing to over $1200 per square metre for one-to-five-hectare land parcels in central locations.
“We witnessed an increase on net face rents in 2021 with an average growth of 4.3 per cent recorded in the prime market,” Catherine notes. “Incentives have remained tight at circa 8.0 per cent to 15.0 per cent. Underpinning compression is the government’s continued investment in infrastructure development coupled with lack of supply and strong demand from multiple consumers. Due to supply chain disruptions, we have also seen an increase in the local manufacturing of recycling, packaging and construction materials.”
Looking forward, despite low levels of population growth, inflation and rises in interest rates – which could impact consumer spending and demand for warehouse space – we anticipate the demand for the industrial and logistics sector to remain strong.
GROWTH OF THE WESTERN SYDNEY MARKET
The Western Sydney market is experiencing record levels of demand that will remain for some time. In 2021, we saw $600 million deployed on land transactions in the Mamre Road Precinct alone.
“The rise in the e-commerce sector is one of the major drivers causing these record highs in Western Sydney, as it leverages the rapid growth of online consumer spending,” says David Hall, National Director of Colliers Sydney West Industrial.
Alongside the expanding e-commerce market, the trend of growth and demand in Western Sydney for occupiers and investors has been largely driven by the expected delivery of key infrastructure, such as the Western Sydney Airport and major road networks.
Broad trends of larger facilities, the shift towards improved automation and efficiency, and growth experienced last year for the precinct are expected to follow much the same patterns in 2022. David notes that this trend will present the opportunity for businesses to move quickly and take advantage of the pre-lease market Western Sydney has to offer. The market will be able to accommodate occupiers seeking the larger, latest generation facilities in strategic locations, ultimately allowing groups to maximise their own business growth potential.
It is important to consider that the rapid growth of the Western Sydney market has also been driven by the change in market conditions experienced over the last two years.
“Business owners have fortified themselves in the event any further changes to the market occur,” says Fab Dalfonso, National Director of Sydney South West Industrial. Fab highlights occupiers have chosen to de-risk their businesses by ensuring they have a national footprint, and Western Sydney as the geographic center of Sydney’s population has benefited from this.
Additionally, the reopening of borders and expected influx of migrants will provide further opportunity for growth within the popular Western Sydney market.
In this current environment, the opportunity for occupiers is to act now. Starting property discussions as soon as possible gives occupiers more time leading to the opportunity to take advantage of the infrastructure on the horizon. Our Colliers experts can help secure the right outcome for your business both commercially and operationally.
THE RISE OF THE TRUCK DRIVER
Industrial property specialists at Colliers, and the supply chain and operations experts at Pollen, announced their strategic partnership in 2021, providing a full end-to-end industrial advisory service. This new partnership will see leading real estate professionals at Colliers working collaboratively with Pollen to provide expert advice to maximise the value of supply chains, technology, automation and the resultant property for occupiers and owners.
Peter Evans, National Director of Colliers Industrial Advisory, and Sean Mitchell, Partner at Pollen Consulting Group, believe businesses must recognise the growing importance of the logistics and supply chain function for overall organisation performance.
“The pandemic may have accelerated a trend that was already brewing in the background,” Peter says. “With consumer trends shifting, the ripples are flowing through the supply chain like never before. Customer service is no longer just the in-store experience, nowadays it is quite simply, ‘How quickly will my online purchase arrive?’”
Sean Mitchell adds to Peter’s point: “Often, the quick response to this market trend is to increase stock levels and fill local warehouses, close to the customer, with stock the business thinks they might want, tag on a good outbound partner, and the supply chain people are done, right?
“Well, not if you want to still be around in 12 months.”
Logistics and supply chain are truly becoming a competitive advantage for businesses. Smart, forward thinking logistics personnel are finding themselves a seat at the boardroom table, and they are focused on four key areas:
1. Circular supply chain management
Logistics are not at the end of the process, they’re not even end-to-end; logistics need to be considered as a circular process. Thinking about the entire footprint of the supply chain process allows optimisation within a business both internally and externally.
2. Recruiting the ‘Quants’
No longer is having years of experience in logistics the only way to succeed. Quantitative, analytical people who can set up data-driven and connected systems are making a name for themselves. Successful businesses are using smart insights to drive replenishment strategies that are segmented by channel, optimized, and connected to the data points that truly influence demand.
3. On the pulse
Continual balance of costs, working capital, and service are imperative to understand the optimal position.
4. Connected leaders operating outside of their comfort zone
Executive levels have functional expertise combined with overall business insights and strategic direction. The importance of this balance is growing, the leaders of today need to get out of their areas of comfort to truly influence the business’s strategic direction.
Our expert team can offer advice to maximise your businesses needs and ensure you have the right expertise driving your supply chain future.
NABERS IN INDUSTRIAL
Originating in Australia, National Australian Built Environment Rating System (NABERS) has established performance benchmarks for various asset classes to support property owners and occupiers in assessing their environmental performance against peers for energy, water, waste, and indoor environment. NABERS employs a ‘nowhere to hide’ approach to performance where each building or tenancy is supplying the same type of data and documentation as their peers to achieve a consistent rating outcome.
Previously covering office and retail assets, NABERS will be launching certification for industrial assets in early 2022. Colliers’ Daniel Shafferman, National Director, Industrial Real Estate Management Services (REMS), and Lisa Hinde, Head of Sustainability | REMS, will be working with the NABERS Accelerate program to help guide their approach in defining energy and water benchmarks for the industrial sector.
“The result of our advice will inform the first industrial ratings in Australia, and not only upskill our teams to handle requests from our existing and future clients to facilitate these ratings, but also allow us to extend the opportunity to be the first rated under this new benchmark,” Lisa explains. “Alongside this, we will support our clients to receive a 20 per cent discount from NABERS when they participate in this first cohort.”
Once formally launched in 2022, the mass adoption of NABERS ratings for the Industrial sector is expected on the basis of a growing push for landlords and occupiers to understand their performance and carbon footprint against peers.
Colliers is anticipating the introduction of this framework will encourage a new collaborative model between landlords and occupiers in achieving joint ESG targets as well as support the necessary metering and monitoring configuration to facilitate data collection. Early intervention at the design stage will be recommended to ensure a smooth transition to an operational rating.
If you’re looking to better understand what sustainability means within your warehouse, our experts can provide advice to maximise the potential of your property.
MAKE SURE YOUR WAREHOUSE SPACE COUNTS
As businesses adapt to their new post-COVID-19 operating environments, we are noticing changing business models and ongoing disruptions to global supply chains. Property occupiers are being forced to deep dive or reassess the underlying fundamentals that support their existing warehousing needs.
Tim Edwards, National Director of Colliers Project Leaders, says, “We have noticed that the increase in land values and rising construction costs – together with historical demand – are driving rental growth.”
The peak in rental costs is driving property occupiers to administer a more detailed analysis around balancing their optimum warehousing and storage needs in addition to maximising operational flexibility and efficiencies. The ability to make a short-term property decision, that will defer the implementation of a more strategic long-term property solution in the right location, is fast becoming a reality check in the new post-COVID operating environment.
Increasing energy costs and labour shortages are placing pressure on overall occupancy costs. For property occupiers, this identifies the necessity to ensure their warehousing needs have sustainability credentials, embedded networks or services for emerging technologies, and the ability to deliver efficient solutions for their physical staffing needs.
“The power of maximising geographical attributes and characteristics of your warehouse’s location is becoming increasing cost efficient, readily available, and easily adaptable,” Tim says.
Disruptions to global supply chains and delivery timeframes continue to impact current storage solutions, operational flexibility, and long-term growth strategies. As a result, property occupiers should consistently review their traditional supply chain strategies and storage solutions.
“To positively adapt to the ongoing disruptions and changing business models, property occupiers should transition or implement new mechanisation systems or technologies, and automation solutions,” Tim adds.
Ensuring your current warehousing space is “the right fit”, while delivering operational efficiencies and reduced occupancy costs, is now more important than ever. So … how prepared is your current warehousing space to encounter these challenges?
We recommend exploring these questions when selecting your next warehouse or reviewing your current space:
Does your warehouse space accommodate your required operational needs and business model?
Are the building services and high energy usage elements within your warehouse adaptable to support the implementation of emerging technologies and sustainability initiatives/enhancements?
Does the current design of your warehouse enable fast, efficient, and optimised movements of your products and goods?
Can your current warehouse space incorporate alternative storage solutions or automation?
Our expert advice to property occupiers can help lead your business into the future. Make your warehousing space count.
Working with occupiers, developers, and investors, our team of Industrial real estate experts offers industry leading advice and delivers enterprising solutions. Our strength lies in providing national expertise – with a focus on detailed local knowledge – and our ability to collaborate with our experts globally. In this current environment now is the time to act. Contact one of our Colliers experts to see how we can accelerate the success of your business and maximise the potential of your property.
For more information on Colliers Industrial Real Estate Services, click here.
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