Industrial & Logistics

Industrial & Logistics Market Outlook

A brief summary of the trends in the industrial and logistics market and the expected trends in this market in 2021 relating to vacancy, capital value, opportunities and challenges.

Whilst retail and office markets have felt the impacts of COVID-19, industrial and logistic assets have remained resilient, experiencing strong capital value growth and yield compression over H2 2020 and H1 2021 (m3Property, 2021 & Savills, 2021). This asset class has experienced continued demand from both domestic and foreign investors, as it has been viewed as a safe haven for investment in an otherwise turbulent and uncertain commercial market (m3Property, 2021). Whilst the asset class as a whole has experienced strong growth, well-located warehouse and logistics facilities servicing densely populated areas have been attributed as the main cause of meteoric capital value growth and yield compression experienced over the last three years.

Other commercial asset classes have experienced COVID-19 related rises in vacancy rates and downwards pressure on rentals in some market segments, however industrial and logistics assets have bucked the trend, experiencing continuous demand from tenants over the last 12 months. Growth in e-commerce and online shopping has been driving the demand for warehouses in strategically advantageous

locations. As over half of Australia’s population is located in Sydney, Melbourne and Brisbane, it is anticipated industrial land values will continue to rise, which will likely result in increases in industrial rentals. As e-commerce continues to grow, reverse logistics and delivery times will poses challenges to investors, and this will place pressure on occupiers to meeting growing demand in a cost-effective way (CBRE, 2021).

The premium between primary and secondary industrial assets has widened as investors have shown a preference towards newer assets with superior tenant profiles. hilst some secondary grade tenants have not weathered the pandemic well and this has been evidenced by rental reductions, shortages of industrial land in capital cities have guarded against downward pressure on prime rentals (m3property, 2021). However, despite this shortage, investors have shown a focus on tenant retention, and this has been demonstrated by small increases in incentives that were being offered pre-COVID-19. It is forecast that this trend will continue well into 2021 and the low cost of funds and increased capitalisation Post-COVID-19 sales evidence has indicated a substantial rise in industrial values, and it is expected that this will continue throughout the 2021 calender year (m3property, 2021). In some areas, rentals are lagging behind capital values. Forecasted expectations for capital values moving in 2022 will depend on interest rates and the cost of debt (CBRE, 2021). Long-term bond rates have recently risen, and it is expected that this will have an impact on the weighted cost of capital.