‘Golden Child’ Industrial Momentum Falters

Industrial was 2022’s “golden child” of real estate assets, and it won’t be losing the mantle any time soon, according to research from Colliers.

But while Colliers expects it to remain strong, it is predicting a softening in the sector in 2023.

The weighted average national industrial prime rent (net face) grew by 21.7 per cent in 2022, six times the 10-year average of 3.6 per cent a year, Colliers said.

Short weighted average lease expiry (WALE) industrial stock would remain strong throughout 2023, it said.

However, this rental growth came with a caveat, according to Colliers managing director of valuation and advisory services Dwight Hillier as “the softening of yields to date has outpaced rental growth”.

“We’re forecasting another 6 to 8 per cent rental growth, which will provide a little more interest in terms of investor sentiment and demand for industrial stock,” he told The Urban Developer.

“But we’re also forecasting some further yield expansion, probably up to 50 basis points over the course of the year, which will unfortunately create headwinds in that it will potentially offset some of that rental growth.”

Colliers predicted that rents would need to increase 7 per cent to offset 25 basis points of yield expansion. 

“Right now, the demand for industrial assets to lease is still quite strong. To have that shorter WALE allows you to access that rental reversion.

“But it’s very short term. The long-term average for rental growth in national industrial markets is about 3.6 per cent, and we can see those markets returning to that fairly imminently. 

“Our view is that it’s a short-term remaining run on the theme we saw in 2022 where we saw almost a 22 per cent increase, so it is starting to wane in terms of growth but still, there are remnants of a lot of momentum at least in the first half of 2023.”

National prime yield is expected to stabilise by mid-2023, taking the national prime yield to just over 5.25 per cent.

Although there wasn’t necessarily an area of industrial that had shown itself to be outstanding, some areas had and would continue to be strong, Hillier said.

▲ Colliers managing director of valuation and advisory services Dwight Hillier: some bigger players are embarking on multi-level industrial developments.

“Your inner-ring industrial logistics locations like those in south and west Sydney, that are well placed in terms of infrastructure and road networks, continue to be in high demand.”

Other sectors have not been so lucky.

“Over the next 12 months, office will be impacted the most. The well-worn phrase ‘price discovery’ is the period we’re still in,” Hillier said. 

“We’re still not seeing a lot of capital transacting, we’re seeing some activity which hasn’t converted, which was showing already at the start of late last year, and some material repricing potential, but that is in a negative direction, particularly for Metro markets.

“B-grade markets are likely to be impacted the most in the CBD and Metro markets are likely to be impacted most of all.” 

This has led to some asset owners investing in upgrading their B-grade offices.

“There will be those who are able to continue to reposition their assets, there does need to be that investment from owners to improve the quality of accommodation but also where there is an opportunity to improve their ESG credentials as well.” 

However there will be stronger opportunities in Premium and A-grade offices towards the end of next year as investor appetite grows “in alignment with occupier preferences post pandemic,” Hillier said.