Brisbane’s industrial market to strengthen

Demand will be boosted by improving economic conditions and major infrastructure projects, according to Knight Frank research

10 August 2018, Brisbane – VACANCY in Brisbane’s industrial market is continuing to trend downwards – particularly for secondary stock – as demand grows, according to the latest research from Knight Frank.

The Brisbane Industrial Market Overview – July 2018 found vacant space reduced by 3.3% over the quarter to July 2018 to 480,529sq m, and is down by 16% over the past year.

The bulk of the improvement in vacancy came from the secondary market, which fell by 39% in the past year, a trend aligned to rental discounts over the past 18 months. In contrast, prime vacancy increased by 15% over the past year.

The outlook for Brisbane’s industrial market going forward is positive, with demand expected to be boosted due to improving economic conditions and major infrastructure projects.

Economic conditions in Brisbane have improved markedly over the past year, with a return to trend growth expected for 2018-19, according to the report.

“Queensland’s economy has strengthened with exports increasing and population growth lifting higher,” said Mark Clifford, Knight Frank Joint Head of Industrial.

“This has been supported by employment growth of 83,930, an increase of 3.5%, over the year to June 2018, second only to New South Wales, which has brought the Queensland unemployment rate down to 5.9%.

“Much of the employment growth in Queensland has been within blue-collar industries, including manufacturing, wholesale trade, and agriculture, mining and utilities, positively impacting industrial demand.

“This improvement in the economy, along with commitments to major private sector development and infrastructure, which will lead to construction, will generate demand in the industrial market going forward.”

Chris Wright, Knight Frank Joint Head of Industrial, said larger tenant activity in the industrial market had recently been concentrated in food, building products, and retailers or associated logistics, but that was likely to change moving forward.

“With indications residential building starts and approvals have peaked, attention is turning towards demand arising from the major commercial and infrastructure construction pipeline, now established for Brisbane.

“The largest of these is the Cross River Rail, a $5.3 billion project set for completion in 2024.”

Jennelle Wilson, Knight Frank Partner – Research and Consulting Queensland, said across the general leasing market the rolling annual take-up at 364,373sq m was 10% above the long-term average, with demand steady.

“Excluding design and construct commitments, analysis of absorption over the past 12 months indicates that 38% of leasing activity was within spaces of 3,000 to 6,000sq m,” she said.

“There has been a welcome return of activity from medium-sized businesses with 21% arising from 6,000 to 9,000sq m users and a further 15% from 9,000 to 12,000sq m.

“Despite competition from design and construct developments, 26% of take-up came from existing or speculative product of 12,000-plus sq m.”

The Brisbane Industrial Market Overview – July 2018 found speculative construction accounted for 35% of prime vacancy in the industrial market, but the take up was set to increase.

“Available speculative space increased from 60,795sq m to 97,533sq m over the past year as build starts have continued, but only 16,428sq m has been absorbed,” said Ms Wilson.

“However, significant deals are understood to be pending as tenants continue to show a clear preference for new space. Major spec developments currently include the Goodman development of 16,218sq m at Lytton and a 17,880sq m building pre- purchased by Ascendas at Berrinba.”

The report found total supply in Brisbane’s industrial market is expected to be lower over 2018 with low speculative starts and no large-scale design and construct (D&C) completions due, but construction is expected to accelerate in 2019 with 325,000sq m of new supply currently slated.

Mr Clifford said as stock on the market was reducing, particularly in some southern precincts, there were now signs of secondary rental growth.

“While absorption is steady and vacancy is falling, there has not been enough competition to trigger significant rental growth.

“Recovery in the secondary sector has resulted in higher growth than for prime, however tenants remain cost sensitive. The institutional developers with remaining land can still offer attractive deals on D&C options, keeping a lid on prime rental growth.”

While rental growth remains modest, the value of land is appreciating in response to reducing availability and sustained low yields, said Mr Wright.

“Land values are growing strongly in selected precincts and this will spread across the market.

“Price appreciation has been most evident in the TradeCoast region where smaller lots have increased by 23.5% in the past year to $525 per sq m.

“Equally, a perceived lack of larger sites and continued demand from sizeable users has resulted in 8.6% annual growth in 1 to 5-hectare lots across Brisbane. Leading this is the South East where 1 to 5-hectare lots appreciated by 17% in the past year to $265/sq m as development momentum is now established in Yatala.

“Large institutional investors and developers are examining opportunities for the next wave of industrial land production, with the search turning to infill or new greenfield opportunities.

“There has, however, been limited movement in bringing new estates to the market to date. With values just returning to the prior peak levels of 2008/9 further price growth is required to trigger the next wave of development.”

The Knight Frank report found yields for industrial assets have continued to fall over the past year, with yields for prime and secondary assets falling by 17 and 26 basis points respectively.

“Prime yields are supported by the weight of funds, whilst secondary yields are supported by land values,” said Mr Wright.

“For prime yields the annual rate of decline peaked in late 2017 at 28 basis points and has since begun to slow. In contrast, the secondary market, buoyed by improved vacancy, localised rental increases and the underlying value of land has seen yields maintain a strong tightening trajectory.”

The report found investment demand in the Brisbane industrial market had remained elevated, but a lack of available assets muted the level of turnover to $733.6 million during 2017-18.

“The demand for core assets with long WALEs has remained largely unfulfilled with few of these assets made available to the market,” said Mr Clifford.

“Instead we have seen the continued increase of vendor leaseback sales with corporates taking advantage of the strong investment environment to sell while yields are low.

“Recent examples have included Vermeer ($15.4 million), Kent International ($13.5 million), Sime Darby ($74.8 million), Ethical Nutrients ($28.25 million) and Scotts Refrigerated Freightways ($22 million) with the purchasers a range of unlisted entities and one private investor.

“This has contributed to owner occupiers being the largest net sellers over the past year, while at the same time there has been strong owner-occupier purchasing activity totaling $161 million.

“Private investors remain active, taking advantage of the low interest rate environment, accounting for 19 of the 49 sales during the year. Clearly however, unlisted funds and syndicates are the dominant net purchasers with AREITs largely priced out of the market and offshore groups struggling to find the requisite scale within Brisbane. “


Download and read Knight Frank’s full research here.