Warehouse Warning as Tenants Take Upper Hand

The industrial sector has been warned its time to build assets for the future and not the past. With the sector about to enter what ’ s been tipped to be an unprecedented period of oversupply, things are swinging to favour tenants. As well, automation, increasing heights, solar generation to power delivery vehicles, branding and employee retention are among elements rising in importance for warehouse design and will tip the balance between success and failure, according to sector experts. But developers are still building sheds like it is 1975. In the next 12 to 24 months projects at such locations as Eastern Creek, Erskine Park and St Marys are due to come online, as well as the launch of the Aerotropolis Badgerys Creek development. Vacancies in the sector are now around 5 per cent, compared to the 0.5 per cent of 18 months ago, according to industrial consultancy firm Prological. The sector in Sydney holds the equivalent to a year’s worth of pre-Covid supply with 300,000sq m of sub-lease stock available. Prological managing director Peter Jones says these rates, combined with the rise of new technology, are pushing expectations around warehouses from investors and tenants higher. ▲ Prological managing director Peter Jones: I want them to say, I work in this facility and I love coming here. The firm is an Australasian supply chain “consultancy pioneering commercially astute and operationally sustainable supply chain solutions”, it says. “As far as my crystal ball can see with any certainty, within Sydney particularly ... for the next five to seven years, it’s going to be a tenant market,” Jones says. “So the opportunity exists for the tenant to take the lead on their specific requirements. “The challenge is that all of the money ... sits with the developers. “That always sets the argument for the developer: ‘this is my train set. This is my asset. I’m the one putting the $100 million on the table’ or whatever it is. “They have their systems of processes that allow them to build these facilities at a dollars per square metre rate. “To build a more modern warehouse, doesn’t necessarily cost more, but it does require the developers to follow a different process ... which means change.” Jones says fiddling with the economic model is not straightforward but there is much headroom to be doing things differently and to look at operation optimisation. He says the people who work in the buildings are central to the tenant’s business and “I want them to say I work in this facility and I love coming here”. “Walking into a warehouse at 6am in July and it’s 2 degrees and blowing a gale from the south-west. That is not a nice environment,” Jones says. “And yet that can be totally changed just by looking at a few design parameters.” ▲ The McLaren Technology Centre in Woking in the UK includes a pool, fitness centre, laboratories, testing and production facilities. Jones says buildings need to be self-sustaining during daylight hours which currently will take about three years to show a a return on the investment in the infrastructure needed to achieve that. “While there ’ s token elements to energy generation now on most new warehouses, they’ll [just] have a little bit of solar tucked around the corner of the roof and tick the box,” he says. “Very few of them are actually putting in the infrastructure requirements to allow for energy storage and in some environments that makes economic sense today to do. “There is ... now the ability to use electric vehicles for your local distribution and to run those electric vehicles off power that you generate on your building.” Jones says that in 50 years warehouses will be running their own energy generation and storage on site, or be part of microgrids, and yet the provisions to prepare for that infrastructure is not being put in place. Another major driver of change is robotics. Jones points out that “automation is agnostic to height”. “In Sydney, we’ve got one warehouse that’s 45m tall, there’s about 10 now that are above 20 metres. “Looking at large ASRS [automated storage and retrieval] systems, or using systems similar to Amazon’s, you have multiple floors. “So then you’re getting really good utilisation of your land footprint, which in Sydney is now running at $1200 to $1400 a square metre.” Jones says that in parts of Sydney land values mean it is more cost effective to go up—or move to Melbourne where the land is cheaper. ▲ Amazon’s robotics fulfilment centre at Goodman’s Oakdale West Industrial Estate in Western Sydney uses multiple levels to improve efficiency of space. The Knight Franks Australian Horizon 2025 report found there is likely to be more divergence in rental performance between the markets thanks to higher supply levels. This includes Sydney’s Outer West and West Melbourne, where as markets such as South Sydney and East Melbourne will be less affected. Knight Frank national head of industrial James Templeton says variation for rents emerging between the precincts depends on the available supply and the level of competition for tenants. “In Melbourne growth is strongest in the established east and south—east precincts where there is less supply able to be delivered,” Templeton says. “In Sydney the growth continues to be led by the tightly held South Sydney market.” Templeton says irregardless, the industrial land market continues to defy expectations “Industrial land values have held up despite rising construction costs and pressure on asset values,” Templeton says. “And the scarcity of readily developable land means this is likely to continue in 2025, even though the development market is softening.” ▲ A render of the Hassell-designed AMRF or Advanced Manufacturing Research Facility building, the first at the Bradfield precinct west of Sydney. However, the existence of industrial-zoned land is just part of the delivery and value equation, as the Western Sydney experience illustrates. “Without essential services the ability to capture tenant demand remains elusive,” Templeton says. “This is particularly the case as greater tenant scrutiny and conservatism comes in tandem with new pre-commitment decisions. “As such, zoned and serviced land values are expected to continue to hold firm and potentially return to growth in 2025 with developers looking through the current slowing in development and maintaining their long-term appetite for the sector.” While it might be a tenant-led market in the near future, developers and investors need to start planning for the second and third stages of their assets, particularly in a 50-year lifecycle. You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

Warehouse Warning as Tenants Take Upper Hand

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