Rising construction costs and higher land values has slowed the initiation of new development across the industrial sector, according to the latest Herron Todd White (HTW) Month in Review.
In the July report, Director David Walsh said many industrial development costs were starting to stretch as prices rose.
“Buyers who purchased an industrial site in late 2021 or early 2022 and had a ‘healthy’ feasibility at that time, are now going to tender only to discover build prices are much higher and yields are starting to soften,” Mr Walsh said.
Mr Walsh said a combination of higher land costs, rapidly rising construction costs and peaking yields had many new projects unviable.
“These elements, coupled with higher site values reflect a much lower profit margin in their cashflow analysis,” he said.
“That’s bad news if you’re seeking funding.”
After a strong period for industrial property, sales had started to slow.
“As interest rates continue to increase, the market is likely heading into a phase where there will be a noticeable disconnect between vendor expectation and market value,” Mr Walsh said.
“I should note however that leasing continues to be strong, which will no doubt become more of a focus for agents.”
HTW Commercial Director Angeline Mann said the Sydney industrial market continued its strong start to 2022 with no sign so far that the market was slowing down.
“We have seen value increases and yield compression within most Sydney industrial markets, however with the recent speculation about the economy and interest rates, we expect that this trend will not continue and the market is more likely to plateau later this year,” Ms Mann said.
“In terms of construction, there have been limitations to the possibility of new development due to the lack of land available.
“Despite strong demand for new stock, development has been constrained due to the lack of land to develop and the rapidly increasing price of land.
“The land that has been available in western Sydney has been somewhat limited to institutional grade.
“We caution that in the current market there is a possibility of over-capitalising on certain developments or redevelopments when considering historically high industrial land values and international supply issues leading to escalated construction costs.”
HTW Director Jason Stevens said the industrial market continued to show capital growth.
“In Melbourne specifically, the growth has occurred off the back of a shortage of suitably zoned land and rising occupancy demand,” Mr Stevens said.
Mr Stevens said demand had been further fuelled by the growth in e-commerce, supply chain issues, continued population growth and a low interest rate environment.
“New industrial development has continued to occur across all industrial property sub-categories, from small to medium scale multi units, mid-range office and warehouse properties and larger scale distribution-style development,” he said.
“The cost of materials and labour continues to rise, adding increased pressure on new built form development.
“As a result, developers’ margins continue to be squeezed. Whilst capital values have risen over the past three to five years to offset increased costs of construction, uncertainty for developers is starting to build as the impacts of the recent interest rate rises (implemented by the Reserve Bank) and any subsequent rate rises in late 2022 are not yet known.”
HTW Director David Walsh said demand from both owner-occupiers and tenants had remained strong due to the current space requirements for warehousing and increased manufacturing activity.
However, this has significantly outstripped supply and resulted in a supply-side shortage.
“Development activity has still proven to be strong with numerous development projects continuing in 2022 in the greater Brisbane area,” Mr Walsh said.
“A large proportion of developments occurring this year have flowed on from the past two years as the supply of vacant industrial land and englobo sites has been rapidly absorbed, resulting in developers paying premiums for readily developable industrial sites.
“New developments are in keeping with the theme of a flight to quality across all price points for standard warehousing and manufacturing industrial assets.”
HTW Commercial Director Chris Winter said the industrial property market in Adelaide had remained strong throughout 2022 with vacancy rates remaining at low levels.
Demand continued to be strong, fuelling new industrial developments throughout metropolitan Adelaide.
“Overall, industrial development is struggling to keep up with demand, particularly high quality accommodation, which continues to achieve far higher rates than historically expected,” Mr Winter said.
Investors and owner-occupiers continued to battle each other for space and there is currently no indication of this trend changing as vacancy rates remain low.
HTW Director Greg Lamborn said the industrial property market in Western Australia had steamed ahead to be the clear best performer of the three big asset classes in 2022.
“Quite unexpectedly, the Western Australian industrial property market finds itself on a strong upwards trajectory thanks to a combination of low stock, limited development-ready land, rising construction costs and strong demand from both tenants and buyers,” Mr Lamborn said.
“Construction material supply chain disruptions and labour shortages have contributed to a pronounced escalation in build costs and often caused delays in project timelines, however market rental rates would appear to be rapidly gathering momentum and improving the return on capital investment.”
HTW Director Terry Roth said there was little new development of industrial property in the greater Darwin area.
“Developments are limited to purpose-built facilities for a specific user, such as the new Kent Removals building at East Arm (recently completed) and the APA project at Winnellie (under construction),” Mr Roth said.
“The limited number of modern, strongly leased, investment-grade properties available in Darwin have attracted yields as low as 6 per cent but it is a much different story for more run of the mill industrial property around Darwin.”