Industrial property hits $300b and will surge ahead of offices

Once the ugly duckling of the commercial real estate sector, demand for prime logistics assets has soared as global fund managers have reweighted their portfolios, downsizing their exposure to the office market, where tower values have tumbled 15-20 per cent in Australia (and more in other regions) on the back of rising vacancy rates and higher interest rates.

According to CBRE’s latest industrial and logistics report, the combined value of completed warehouse facilities (over 5000 square metres in size in Sydney and Melbourne and over 3000 square metres in the other capital cities) increased to $293 billion as of December, while the office market was worth $295 billion and retail $267 billion.

Less than three years ago – in September 2021 – the combined value of industrial property was just $137 billion, according a CBRE report.

By comparison, the investible office universe was worth $350 billion in May 2022, with about $55 billion, or 16 per cent, wiped from the market in less than two years.

Industrial property now makes up 34 per cent of the commercial real estate investment market, up from about 20 per cent in 2019, and just behind office at 35 per cent with retail at 31 per cent.

Behind the surge

Driving the rise of industrial has been the ecommerce boom, which has lifted warehouse rents 45 per cent since 2021 on the back of vacancy rates of 1 per cent in Sydney and Melbourne, among the lowest in the world.

This surge in warehouse values brought with it two “changing of the guard” moments in commercial property.

The first occurred in January 2019 when Goodman Group’s market value rose above Westfield mall landlord Scentre Group for the first time (Goodman is now worth $58.5 billion versus Scentre’s $17 billion) making Goodman Australia’s most valuable real estate investment trust (REIT).

The second happened in September 2021 when yields on prime warehouses fell below those for top CBD office towers for the first time ever.

Strong rental growth

Looking ahead, Sass Jalili, CBRE’s Australian head of industrial & logistics research forecast Australia’s industrial and logistics investable universe to reach $410 billion over the next decade.

While CBRE was unable to provide a forecast for future size of the investable office universe, given the rent trajectory of both asset classes and future stock completions, Ms Jalili said industrial and logistics could become the bigger commercial asset class in the next 12 to 18 months.

While some of the growth in industrial property values has started to unwind due to higher interest rates – total assets under management fell 2 per cent to $79 billion at industrial heavyweight Goodman Group over the six months to December – very strong rental growth has prevented the sharp falls in valuations recorded by office and mall landlords.

“Despite industrial and logistics yields expanding by an average of 122 basis points across the country over the past 12 months, rents grew by 18 per cent year-on-year and three million square metres of new floorspace was also added to the market over this time,” Ms Jalili said.

While occupiers will have more choice this year as more warehouse space comes to market, already 50 per cent of this new stock is pre-committed and therefore vacancies won’t reach the equilibrium rate of 4 per cent in the next 12 months, CBRE predicted.

“We forecast rental growth for the year ahead will be in high single digits, particularly for markets where vacancy rates currently remain below 1 per cent” Ms Jalili added.

Demand for industrial property remains strong, with CBRE identifying about $20 billion of capital that is currently seeking to be deployed into industrial and logistics assets, around four times the $5 billion of warehouses that traded last year.