Construction Crisis Wipes Quarter of Industrial Pipeline

Australia’s pipeline of new industrial and logistics space for the year has been downgraded by nearly a quarter—600,000sq m—thanks to the construction crisis.

The downgrading of the outlook, thanks to construction delays and rising costs, across the five major cities from 2.7 million square metres to 2.1 million square metres is included in CBRE Research’s Industrial and Logistics report for the September quarter.

But the sector has experienced record rental growth, according to the report—up 6.7 per cent quarter-on-quarter for super prime assets, with rents across all grades rising 16-19 per cent year-on-year nationally.

At the top of the increase, Sydney’s newest facilities rents are up just shy of 30 per cent.

A total of 654,000sqm of new supply came online in the quarter to bring the year-to-date figure to 1.4 million square metres, all but matching the long-term average of 1.5 million square metres.

Construction delays stemming from wet weather and labour shortages, and rising costs based on material shortages and supply-chain disruptions had delayed some projects by up to one year, while others had been cancelled altogether, the report said.

Australia’s national industrial and logistics vacancy rate sits at a world-low of 0.8 per cent, with Sydney’s rate the lowest in the country at 0.3 per cent and Brisbane’s the highest at 1.4 per cent.

Of the forecast 2023 supply pipeline of 2.5 million square metre, 41 per cent is already the subject of pre-commitments.

“Occupier demand continues to outstrip supply in most capital cities,” CBRE regional director, industrial and logistics, Pacific, Cameron Grier said.

“Developers are simply not able to bring on space swiftly enough, with long delays in planning approvals in some states and construction delays caused by wet weather and labour shortages.

▲ The construction crisis is costing the logistics and warehouse sector dearly.

“For some projects, this is adding up to delays of six to 12 months.

“Coupled with the lack of supply being brought to market, when you overlay some 40 per cent increase year-on-year in construction costs and softening cap rates, it’s putting even further upward pressure on rents to hit the new return hurdles of investors.”

Weighted-average net face rents for super prime facilities have risen by 19.2 per cent year-on-year, with the national average now sitting at $134 per square metre after the quarter’s further climb of 6.7 per cent.

Sydney and Perth have recorded the largest 2022 rises to date, 29.6 per cent and 24.3 per cent year-on-year for super-prime assets, with Perth’s September quarter rise of 9.3 per cent the nation’s biggest.

“The quarter was another of record-breaking rental growth in Australia’s industrial and logistics market,” CBRE head of Industrial and Logistics Research Australia Sass J-Baleh said.

“To bring the Australian market to a state of equilibrium, around 3.7 million square metres of space is required and only 2.5 million is currently under construction.”