Industrial Subsectors Win Investor Attention as Demand Blossoms

The industrial sector is evolving as Australia invests in a hi-tech future and its booming population. And developers and investors are catching on to the opportunity of a more diversified industrial offering, according to Savills head of research Katy Dean. “Industrial is no longer just sheds. Yes, it’s ambient warehousing, but it’s also cold storage, data centres and advanced manufacturing,” Dean says. “Demographics, subsequent consumption and increasing supply-chain complexity are all reshaping the sector, and creating new competition for industrial land and assets.” Multiplex regional managing director for Victoria and South Australia Ross Snowball is operating at the coal face of this diversification. ▲ Globally, inadequate refrigeration leads to the loss of 12 to 13 per cent of all food produced annually. “Absolutely the sector is diversifying into much more complex facilities,” Snowball says. Multiplex recently completed a Moderna vaccination facility in Melbourne with cold storage and end-to-end manufacturing capabilities ( pictured top ), as well as delivering the new Amazon centre at Craigieburn with ESR as distribution centres become increasingly more complex and automated. Centuria has long been interested in the industrial subsectors, head of listed funds and Centuria Industrial REIT funds manager Grant Nichols says. “We’re open to, and haven’t shied away from, any subsector,” Nichols says. “We see very strong demand and foreign capital gravitating towards industrial subsectors in Australia, which is significantly different to 10 years ago. “Subsectors were previously lumped together, whereas now people are giving more thought to the specialisation within industrial markets and how they can potentially outperform each other.” Follow the money Cold storage is becoming more crucial, Dean says. The number of Australians living in cities is now about 91 per cent of our growing population and that is driving a rising spend in hospitality as well as online grocery and food delivery services. With these strong structural drivers behind cold storage, as well as advanced manufacturing being heavily supported by the Federal Government, investors are keeping a keen eye on the subsector, as well as data centres, where growth is being driven by AI take-up. Capital for these diversified industrial subsectors is being raised at a high level, Dean says. ▲ Savills head of research Katy Dean: Industrial is no longer just sheds. DigiCo Infrastructure REIT may be on rocky ground currently, but it was the largest Australian IPO in 2024. Goodman has raised $4 billion to expand its data centre and logistics program, while in the US, Lineage Logistics has completed a $US4.44 billion initial public offering, the largest debut of the year. “This underscores the sector’s growth potential. There are clear signals of institutional capital not only targeting the sector and driving change but also aligning it with net-zero objectives and broader structural demand drivers,” Dean says. Also circling are private equity and cross-border investors. “They are viewing cold storage as a pathway to scale, supported by strong underlying demand drivers,” she says. It also helps that Australia’s cold-storage capacity is lagging. At 0.4 cubic metres per urban resident, it is at the low end of the spectrum globally. It needs 400,000sq m to match the US per capita level of 0.6 cubic metres per urban resident, and 1.3 million square metres to equal the 0.9 cubic metres per urban resident in the Netherlands. ▲ Centuria head of listed funds and Centuria Industrial REIT funds manager Grant Nichols. In the data centre subsector, deployable capacity in Australia is expected to rise from about 1350MW in 2024 to 3100MW by 2030. The attraction comes down to strong fundamentals, Nichols says. “The Australian vacancy rate remains materially below many of our global peers, so that is obviously an attractive component,” he says. “The other point, which does certainly inhibit development in the majority of industrial markets, is that nationally, the economic rent required for new developments remains above the market rent. “So at the moment, it is difficult to make a feasibility stack for a lot of industrial development, which is why we think there is going to be continued constraint on supply, which will keep vacancy rates down and continue to see some very, very good metrics within industrial markets across Australia,” Nichols says. Geographic dimensions of diversity Investment profiles differ across the country. In Sydney, institutional ownership is the highest at 69 per cent, with 59 per cent invested in Melbourne and a much smaller cut of 35 per cent in Brisbane. “Vacancy is virtually non-existent in all those markets, meaning there are liquidity plays in older assets already positioned in the best locations, while the new builds coming through are also highly appealing to investors,” Dean says. But land availability is both a curse and a cure. “As an existing industrial owner, one of the reasons we like urban infill markets is that there is restricted land supply,” Nichols says. ▲ Multiplex regional managing director for Victoria and South Australia Ross Snowball: All operators follow the power and the water. “That land-supply restriction will allow us to hopefully continue to see and drive rental growth.” It has also worked to consolidate and build up larger sites in existing urban infill locations. “That gives us the ability to redevelop land to a more contemporary industrial facility which can deliver an improved product and hopefully higher rents,” Nichols says. It is focused on developing in urban infill spaces—thanks to tenant demand and the ability to drive stronger rents—as well as the proximity to last-mile logistics and workforces. But an element hindering the progress of these power-hungry industrial subsectors is access to the grid. “The availability of land is absolutely critical, and all operators follow the power and the water,” Snowball says. Powering up the subsectors Multiplex’s Snowball says that these subsectors have a heavy focus on complex services. “[That includes] the heating and cooling of these facilities and dealing with the energy requirements of these facilities, particularly when it comes to data centres,” he says. Data centres use an estimated 3.5 million litres of Sydney’s water supply a year. The UN Environment Program estimates that global demand for water resulting from AI might reach up to 6.6 billion cubic metres in 2027. “Water can be continually reused, if it’s done appropriately and designed into the facility,” Snowball says. ▲ Highly automated distribution centres can be more like advanced manufacturing facilities in scope and complexity. “Operators and developers are very conscious of that and trying to reuse the water and energy that they’ve got.” It is not just about sustainability. The more advanced a facility is, whether it’s power usage or automation and robotics, the higher rents and WALEs can be achieved. “The more you invest into a facility, the higher rent you need to compensate for that,” Nichols says. This is also creating competition within and between the subsectors themselves. ▲ Repositioning or upgrading older assets in prime locations is another option being considered. “Data centres need a high proportion of available electricity supply and both manufacturing and cold storage are energy intensive,” Nichols says. “If data centres are taking sites in areas which would otherwise be a cold storage or manufacturing facility, we think there is potential for continued growth, due to the continued squeeze on both manufacturing and cold storage.” But what is clear is that diversification is here to stay, and Multiplex and Centuria have signalled their intentions to expand and diversify. “We’ll continue along this path for diversification within the broader industrial sector, encompassing cold storage, data centres and advanced manufacturing,” Dean says. “But increasingly, the focus will be on how to achieve scale to target returns.” Join us for The Urban Developer’s Industrial and Logistics Summit in Sydney on October 16.

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