Confidence in the Brisbane industrial market appears to be gaining traction. Gross take-up is at levels not seen since 2007, driven by strong pre-lease and design and construct (D&C) activity, and investment volumes remain solid, with prime assets key acquisition targets for institutional capital.
As Figure 1 shows, take-up has been gradually increasing over the past five years, culminating in near record gross take-up in 2012 (633,400 sqm), behind only 2005 when 673,900 sqm of take-up was recorded. Relatively strong occupier movement continued in 2013, with the majority of recent deals in the pre-lease / D&C market. Since mid-last year, leasing deals for new space accounted for more than 56% of all moves (by area), well above the 40% long term average. The higher proportion of take-up in new space represents significant financial investment by occupiers and a commitment to further industrial activity, suggesting improving confidence in the sector.
Additionally, the average size of pre-lease deals has also been increasing. As Figure 2 illustrates, the average pre lease size has been rising since 2008, averaging 20,000 sqm so far this year, or 143% of the long term average. This has been boosted by a number of particularly large pre-leases this year, including deals to Super Retail Group (46,900 sqm) and CEVA Logistic (41,000 sqm).
While greater pre-lease/D&C activity and larger pre-lease deals in part reflects low prime vacancy and limited availability of suitable space, the trend towards new, purpose built facilities is a reflection of a broader recovery in the industrial market, with gradually increasing supply, still relatively high average rents, and prime cap rate compression.
The investment market in particular is very robust. The weight of capital in the market for prime institutional grade assets is very high, with year to date transactions totalling AUD 318.7 million. Nevertheless, transaction activity has been constrained by the limited opportunity to acquire prime product. With unsatisfied investment capital still in the market, average yields have continued to tighten (currently between 7.50% and 8.00%), making Brisbane the tightest industrial market nationally.
However, with greater pre-lease / D&C deals delivering new prime stock to the market, purchasers may increasingly look to Brisbane to satisfy their investment requirements. With long lease terms, large format designs, and locations in close proximity to emerging transport nodes, new supply coming into the market will meet most large investment mandates. The question now is whether owners of such assets will look to capitalise on current demand and divest their newly developed product, or whether they retain the asset in their portfolio in accordance with their own investment strategies. At this point, it appears many owners are choosing the latter option.
Nevertheless, with very strong investor sentiment, solid occupier demand, and a firming development pipeline, confidence appears to have returned to the Brisbane industrial market.
Peter Guevarra is a Senior Market Research Analyst for Jones Lang LaSalle, based in Sydney, Australia.
