Industrial ‘spec’ development boom on Australia’s east coast

Industrial ‘spec’ development boom on Australia’s east coast

19 July 2019

The industrial property market on Australia’s Eastern Seaboard is experiencing a speculative development boom, with volumes in 2019 already on track to exceed 2018, according to the latest Knight Frank research.

The Knight Frank Eastern Seaboard Industrial Development Trends – Insight July 2019 found industrial development activity on the Eastern Seaboard was rising, with the pace of growth accelerating in Sydney and Melbourne on the back of an upturn in speculative (spec) development projects.

Knight Frank Partner and Head of Research and Consulting Ben Burston said 1.49 million square metres of new industrial stock has been completed in Sydney, Melbourne and Brisbane since 2018, and of this, almost 87% was added to Sydney and Melbourne’s industrial precincts.

“It’s estimated that 422,000 square metres of spec stock was completed across Sydney, Melbourne and Brisbane in 2018, the highest on record,” he said.

“But spec volumes in 2019 look so far exceed those in 2018, with almost 560,000 square metres of spec projects underway or proposed to be completed, and this clearly signals the intent of major institutional investors to step up their exposure to the fast-growing industrial sector.”

Mr Burston said Sydney led industrial development in 2018, reaching a decade high, with total completions, including those triggered by pre-commitments, almost 200,000 sq m above the historic average and spec projects accounting for 40% of new total new development in the sector.

However, Melbourne was set to take over this year, he said.

“While Sydney is expected to see similar volumes of spec completions in 2019, it is Melbourne that is likely to reach record levels this year with spec development gathering momentum,” he said.

“Driven largely by demand for western corridor, where the greatest capacity for expansion exists, the volume of spec projects for 2019 in Melbourne is expected to reach 280,000 square metres, more than double the 110,500 square metres delivered in 2018.

In contrast to Melbourne and Sydney, spec development activity in Brisbane appears to have peaked around 2015/16, but is expected to rise with the industrial vacancy rate at six-year lows, said Mr Burston.

“Take-up times are improving, and new projects are being considered on the back of tenant precommitments to part of the available space at various locations.”

Knight Frank Partner and Head of Industrial Robert Salerno said demand for spec development in the industrial sector was being driven by the rise in e-commerce, with occupiers searching for high quality warehouse space to improve their processes.

“E-commerce represents nine per cent of retail sales in Australia and this is forecast to grow to around 12 per cent by 2021, driven by a shift in consumer behaviours towards online purchases,” he said.

“Distributors, logistics operators and retailers are increasingly seeking out supply-chain efficiencies to meet the demands of e-commerce, and it is these occupiers creating the strong demand for and take up of speculative development,” he said.

“The huge demand for quality logistics space is outstripping supply however, with a shortage of quality industrial property available – and this is really driving speculative development at the moment.

“There is a real need to bring new industrial product to the marketplace and take up is high, so there is a great opportunity for developers undertaking speculative developments right now, especially in Sydney and Melbourne.”

The Knight Frank report found that across the eastern seaboard nearly 50 per cent of spec development is leased prior to practical completion, with existing prime stock in key transport nodes in such short supply.

“Rents are rising due to a shortage of supply, and take up of space is high,” said Mr Salerno.

“In Sydney, the average time on the market is one month, with the majority of spec being leased before completion.

“In Melbourne, spec builds average two months on the market following completion and in Brisbane, it is four months.

“Half of the upcoming spec in Melbourne’s West is already under offer, which is indicative of the level of demand in the market and the ‘flight to quality’ trend towards higher-grade facilities.

“In this region, over the 2017 to 2019 period, nearly half of the buildings constructed on a spec basis were leased within six months of practical completion being reached.

“With strong demand to absorb any new industrial development, now is seen to be a good time to spec build in Melbourne.”

Mr Burston said development activity in the industrial market was increasingly led by the major institutions, with most developers heavily weighted towards the Eastern Seaboard markets.

“Logistics type assets are high on the radar of institutions, and they are actively increasing their exposure to this asset class through land acquisition and development.

“The Eastern Seaboard markets present significant development upside in both the pre-lease and spec development markets underpinned by improved infrastructure and strong macroeconomic fundamentals, as well as growth in the e-commerce.

“The level of institutional activity against the backdrop of high demand for warehouse space has contributed to rapid appreciation of land values over the last three years.”