Brisbane

27 Pentex Street, Salisbury QLD 4107

Queensland’s economic outperformance over the past two years has been partly driven by a rise in interstate migration, which has provided both additional demand for goods and services and additional supply of workers.

We expect the upswing in net interstate migration has further to run, which underpins our positive outlook for strong economic growth for 2022 and 2023.

Brisbane prime industrial market indicators South Net face rent ($ sqm) $122 Incentive (%) 16

Yield (%)

4.3 Capital value ($ sqm) $2,837 North $130 12 4.3 $3,023 Trade Coast Yatala $140 13 $110 15

4.2 $3,333 4.4 $2,500

Occupier demand for industrial property across Brisbane picked up very strongly during the 2022 financial year. By our estimates, net absorption reached around 715,000 square metres during this period, which is around two-to-three times the long run average. Buoyed by Queensland’s relatively strong economic performance in recent times, businesses are making leasing decisions to enable them to service rising demand from their customers.

Enquiry has been very strong across the South, South East, South West, North and the Trade Coast. Rising interest rates are pushing some would be owner occupiers into the tenant pool, as is the limited options for owner occupiers to purchase.

Demand continues to come from a broad range of sectors as businesses invest in supply chains. However, the most active groups in the market looking for space during the 2022 financial year were transport and logistics, retailers (including e-commerce) and manufacturers. Many businesses are now holding more inventory to guard against supply chain disruptions and would like to take additional storage space if it were available. This is a common theme, not unique to Brisbane. The surge in net absorption during the 2022 financial year easily outpaced rising new completions, lowering the metropolitan vacancy rate to an estimated 1.6 per cent at June, the lowest vacancy since the tail end of the last resources boom 10-years ago. Vacancy rates are extremely low in the Trade Coast and North regions but are so low as to be constraining net absorption across the metropolitan area as a whole.

Reflecting the rapid market tightening over the last 12-months, net stated prime rents rose strongly across the regions to sit between an average $110 per square metre at Yatala up to $140 per square metre on the Trade Coast at June 2022, all up by around 10 per cent per annum.

Average prime incentives started to fall notably during the 2022 financial year, ranging from 12 per cent in the Trade Coast to 16 per cent in the South. Incentives on pre-lease deals can be higher, depending on the developer. Average secondary stated rents demonstrated solid to strong growth as well, rising by 6 per cent to 12 per cent across the regions.

5/14 Freemantle Street, Burleigh Heads QLD 4420

The impact of rising COVID cases on the state’s economy proved to be transitory, with Queensland experiencing a relatively benign experience with COVID over recent months.

Key drivers come from rising interstate migration (and associated demand for goods), positive prospects for mining investment and the shortterm construction boost from government stimulus measures. Travel flows are continuing to normalise, and Queensland is set to be a major beneficiary of this with tourism exports picking up sharply in the most recent data point. Given this, we expect growth will remain robust in the near term, positioning the Queensland economy as a top performer nationally.

Demand for industrial space will also continue to be supported by the structural shift to servicing e-commerce. However, the extraordinary pace of growth that was heightened by pandemic related restrictions has already slowed and is likely to slow further as people balance spending on goods back towards services. Even so, we still expect online spending in Queensland to grow at close to double-digit pace until the middle of the decade.

Like the rest of the eastern seaboard, the food retail spend increased at a rapid pace in Queensland over the 18 months to mid-2021, driving demand for industrial space. The pace of expansion has since slowed and we expect growth in food retailing moderate further, more in line with population growth.

The pattern of the drivers outlined above suggest the take-up of industrial property over the next 12 to 18 months will remain robust. We forecast net absorption remain at or above 580,000 square metres pa until the end of 2023, before falling back to around 460,000 square metres towards the middle of the decade as pandemic related drivers dissipate.

We expect that vacancy rates will remain around current low rates until the end of next year, before rising to around 2.4 per cent in 2025 as an increasing supply response outpaces normalising demand.

The outlook for prime stated rents is for strong growth to be sustained over the next two years, at an indicative circa 10 per cent pa before slowing in the 2025 financial year, with owners winding back incentives. We anticipate rising rents will be underpinned by tight market conditions and rising pre-lease rents (driven by higher land values and construction costs impacting feasibilities) filtering through to market rents.

Southern Brisbane industrial rents and capital values

The Brisbane industrial property investment market was very strong last year, with sales surpassing $1.3 billion. The market started this year with momentum, but the volume and value of sales dropped during the first half of 2022 as rising interest (long bond) rates caused investors to pause.

Major recent sales of Brisbane assets included:

• Sims Ltd buying a 26,000 square metre building at 69 Tingara Street, Pinkenba for almost $90 million;

• Hines paid $211 million for a portfolio of four properties including 55 Brownlee Street,

Pinkenba, reflecting an overall yield close to 3.5 per cent;

• RF Corval bought 52 and 60 Formation Street, Wacol with a combined building area of circa 7,700 square metres for almost $16 million; and

• Centennial Property Group acquired 29 Parker

Street, Pinkenba for almost $16 million.

In line with the Sydney and Melbourne markets, we expect yields for Brisbane industrial properties will come under pressure to start softening over the second half of 2022 as higher bond rates ratchet up investor’s cost of debt. Since 2020, 10-year bond rates have increased by 270 basis points, narrowing the spread to prime Brisbane industrial property yields to well below the long run average.

Evidence suggests many investors are already factoring in higher yields on offers. But there is not a dearth of deals confirming a softening in yields yet. On our forecasts, prime yields in the benchmark South will soften by 70 basis points by mid-2025 lifting them up to an average 5.0 per cent. When combined with strongly growing rents, this suggests capital values will experience reasonable growth the next two years before stalling. Overall, we assess the weight of money chasing industrial property in Brisbane pushed yields down by an average 80 to 90 basis points in the 2022 financial year, with firming seen across both prime and secondary grades and all regions. Most of the firming occurred in the first quarter of 2022, with yields stabilising in the second quarter of as the impact of higher interest rates caused a pause.

At June 2022, we estimate average prime yields stood between 4.2 per cent and 4.3 per cent across the Trade Coast, South, and North. Yields on secondary assets followed a similar pattern. Yields on secondary asset sat between 5.3 per cent and 5.4 per cent across the three major industrial regions at June 2022.

Reflecting the combination of strong stated rental growth and stable yields, average prime capital values showed rapid growth through the 2022 financial year.

Investment outlook

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We estimate an above average 440,000 square metres of new supply was completed across the Brisbane metropolitan area during the 2022 financial year, across circa 29 projects (greater than 3,000 square metres in size). Of the projects completed over the last financial year, the Southern and Western Corridors continued to dominate activity. The volume of completions represented a substantial step up from the 320,000 square metres completed in calendar 2021.

Based on projects under construction and approvals data, around 600,000 square metres of new builds are due for completion metro wide by the end of calendar 2022. The 2023 calendar year is expected to be another very strong year for supply, surpassing the mark set this year.

Activity will be supported by large pre-committed spaces including Winning Appliance (circa 46,000 square metres at Wacol), Bapcor Limited (45,000 square metres at Redbank), a 25,000 square metres facility partially committed to Daikin at Murrarrie and a 23,000 square metres warehouse for Burndy Cable Support at Acacia Ridge. As elsewhere, there is the potential for project completions to slip due to capacity constraints across the construction industry. Most of the developments completed in the 2022 financial year were underpinned by tenant precommitment. However, a notable proportion commenced on a speculative basis. Major developers including GPT, Goodman, and ESR rolled out speculative developments and on the whole were successful in securing tenant requirements that could not wait for a pre-lease to be delivered.

Approvals data over financial year 2022 showed circa $1.16 billion of industrial projects was approved, heavily skewed towards warehouses. This represents a 48 per cent increase on the figure for the 2021 financial year. Around 33 per cent of warehouse approvals over the 12 months to June 2022 are in Ipswich, with 35 per cent captured in Brisbane’s southern regions.

We expect a mixture of pre-leases and spec construction to continue as the major developers look to capture requirements with both longer and shorter turnaround times. Without servicing and rezoning delays, there is plenty of planned industrial land to meet our supply forecasts.

Supply outlook

Brisbane industrial demand and new supply