MELBOURNE’S industrial land supply will run out in 5-15 years, but it could happen sooner due to accelerated demand for space induced by the COVID-19 pandemic and developers might turn to multi-storey facilities, Cushman & Wakefield’s Tony Crabb told an Australian Property Institute REIV conference.
Speaking at the API REIV State of the Markets, Cushman & Wakefield research director Tony Crabb described what has happened in the industrial property market over the past year as “decades in weeks” moment.
“Two years ago, I said industrial is becoming the new retail. Today I can say industrial is definitely the new retail!
Crabb quoted Russian revolutionary and politician Vladimir Lenin: “There are decades where nothing happens; and there are weeks where decades happen.”
“This is what has happened to the industrial market, it is one of those decades in weeks moment,” he said.
“Online sales are up 70%, that is an extraordinary shift. It was already happening, it was just slow but the pandemic has accelerated it.
“Total online sales as total industry turnover is now at 11% in 2020 compared to 6% in 2019 – nearly double.”
In 2015, ecommerce sales as total industry turnover was just under 3%.
Crabb said online shopping is a structural shift and it is not going to back.
“Now that it is firmly in the hands of consumers, everybody has got the hang of it, it will only continue to grow and accelerate. And those organisations that don’t have an online capability are going to fall by the wayside. So there is a lot scrambling to catch up.
“This is not a pandemic one off and we all going to back to the way things were.”
The structural changes meant that Melbourne, Australia’s biggest industrial market – twice the size of Sydney, which in turn is twice the size of Brisbane’s market – once abundant with cheap and plentiful land supply, will be running out of vacant supply in the near future.
According to Crabb, between 2000-01 and 2017-18, a total of 2,423 hectares of industrial land was rezoned and currently 9,211.4 ha are occupied and 6,562.5 ha vacant zoned land currently remains.
The industrial land that was zoned for alternatively use, approximately 50% for residential or mixed-use purposes, which means they are unlikely to be returned to industrial or employment use.
“In the last three years the west has seen a 43% take up of land, which is not surprising due to its proximity to ports, whilst the south has seen a 23% take up,”
The west has 1,810.5 ha vacant zoned land remaining or 15 years and south has 502.6 ha or five years, according to the Victorian government’s data.
But Crabb warned that it could be sooner.
“This projection is based on current rates of take up, but this is expected to accelerate, so this forecast is the best case scenario, it is probably less than that, because acceleration of online shopping is increasing demand for space.
“We have users that come on the market now that want 100,000 sqm sheds and we are running out of spots to put them.
“And if you want somewhere in the south, that’s going to be a problem.
“The market is ridiculously tight at the moment – the tightest it has ever been. There are some speculative developments in the pipeline but not nearly enough,”
In the north, there are only seven buildings or 103,795 sqm (4.1%) available; airport has zero, in the west there are nine buildings 98,877 sqm or 1.2%. In Port Melbourne, only three buildings or 1,986 sqm (10.5%), and in Dandenong also three buildings 47,044 sqm or 1.3%.
As a result, land values have risen. In the south values are considerably higher than the west and north, with small land at approximately $600 per sqm, medium at $540 per sqm and large at $425 per sqm.
Whereas in the west, it is still cheaper with small land at $440 per sqm, medium ($410), large $375. Whilst in the north small is $415 per sqm, medium $330, and $290.
Rising property values is expected to push rents higher in the immediate term.
“In three years time we will see that translate into higher rents because the construction cycle catches up and developers have to recoup the rising costs through rents, so we expect face rents to rise and heading up to levels you see around the country to over $100 per sqm, up from the current rate of $90 per sqm,” he predicted.
During the pandemic, industrial transactions also hit a new record, with over 100 transactions totalling approx. $3 billion.
“This is remarkable given the lockdown and restrictions in Melbourne. Most of the demand came from foreign investors accounting for 43% followed by property trusts with 35%.
As a result, yields now have a 4% in front of them.
“It used to that a 10-year lease and 10% cap rate and that was it, pretty simple. But that is not the case anymore,”
Crabb believes at some point in the future, supermarket and industrial rents will converge at $180 per sqm, “and that’s when supermarkets will flip to industrial logistics centre, the last mile,” he predicted.
“Melbourne is projected to become a city of about 8 – 10 million, part of the reserve land for the future is for residential. There is going to be a real tussle between highest and best use.
“So we will see the emergence of multi-level and we have seen that in Asia, that might solve the issue of lack of land,” he concluded.