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HTW: Was the pandemic a ‘booster shot’ for industrial real estate?

It made sense at the beginning of the pandemic to expect a decline in all commercial property markets. But, as the latest Herron Todd White Month In Review notes, a number of factors resulted in an uptick in the industrial sector in 2020.

“There’s been plenty of change delivered in 2020, and some of it has played to the industrial market’s advantage,” Herron Todd White Brisbane industrial director, David Walsh, said.

The pandemic itself, along with a widening gap between industrial investment returns and other commercial asset classes leading into 2020 ensured the sector remained resilient. 

“Industrial property isn’t considered a ‘fanfare asset’. It isn’t subject to huge swings in performance,” Mr Walsh continues.

“But that’s why 2020 was looking good.

“A number of the other asset classes in recent years such as retail, office, child care, service stations and medical had experienced increased demand from purchasers.

“At some point, attention was going to swing the way of industrial, it was just a matter of time. The returns within the industrial sector were becoming tough to ignore.” 

Mr Walsh singles out the e-commerce and third party logistics spaces, cold-storage and temperature-controlled facilities as being beneficiaries of an increase in online shopping.

“Industrial assets provide the ability to store stock, so it would be ready to meet consumer demand.” 

Greg Mullins, senior commercial valuer with Herron Todd White Perth, concurs.

“COVID-19 provided more impetus to what was happening pre-pandemic in terms of increased focus on logistics properties,” Mr Mullins said. 

“People were in lockdown and rather than going to bricks and mortar shopping centres, they bought online.

“All this stock has to come from a warehouse somewhere and be dispatched via distribution/ fulfilment centres, which are basically big sheds on large blocks of land in industrial areas.” 

Mr Mullins notes how “investors simply want the best tenant with the strongest lease covenants paying the highest rent”.

This is one of the challenges that Mr Walsh singles out, moving into 2021.

“When the pandemic hit, the commercial code saw numerous lease arrangements renegotiated with tenants,” he writes. 

“Most were granted rental relief in return for an extension to their lease period.

“However, many leases were also due to expire this year, and tenant quality is an imperative for investors. As such, good, secure tenants are in high demand and can negotiate strongly.”

For the industrial real estate sector to continue to boom, Australia needs to shore up its own production and distribution pipelines.

“There’s been a lot of talk about opportunities for Australia to grow its manufacturing base, which plays directly to the need for industrial assets,” Mr Walsh explains. 

“While I would like to see this sector improve, the fact remains that it’s difficult to compete in the manufacturing field with countries that have lower labour costs. 

“Once the logistics of global stock movement improve, Australian manufacturing will be challenged to stay competitive.”

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