- Demand is still strong with owner-occupier performing in the sub-$10 million market.
- Next 12 months will be heavily impacted by inflation and what the RBA needs to do.
- Within Australia and internationally, 2023 will be a year to be cautious, says HTW
Industrial property has been one of the best-performed asset classes over the past few years, but higher interest rates are likely to see demand continue to fall according to Herron Todd White.
HTW Industrial Director, David Walsh said It would be overly pessimistic to say that the industrial market will see dramatic changes in 2023, however, the market will no doubt experience a softening in comparison to the previous two years.
“All indications suggest 2023 is going to be a challenging year with interest rates biting across all property sectors,” Mr Walsh said.
“Residential sale volumes are slowing, and commercial values are softening as vendors and purchasers grapple with differing expectations.
“In addition to this, construction costs are continuing to have a brutal impact on construction projects.”
Back to normal transaction levels
Mr Walsh said on the back of record transactional values nationally in 2021, volumes in 2022 reduced to a more normal level resembling those we saw prior to COVID-19 and yields began to show early signs of stabilising.
He said, “before the aggressive monetary policy from the RBA, prime yields in the institutional space were sitting around 3.75 per cent to 4.50 per cent and yields in the middle markets were in the vicinity of 4.25 per cent to 5.25 per cent.
“Discussions with leading agents in the Brisbane industrial market, for example, have however revealed that yields have compressed circa 50 to 100 basis points across all markets since interest rates began to rise.
“Demand in the institutional space has also begun to deteriorate with industrial funds, REITs and property syndicates retreating somewhat due to the difficulty of cash flow forecasting and predicting accurate target returns for investors.
“Notwithstanding this, assets located within prime industrial locations have demonstrated strong leasing results and continue to be well received by the market” said Mr Walsh.
Demand remains strong
According to Mr Walsh, demand is still strong for industrial assets with the owner-occupier market being an outstanding performer in the sub-$10 million market.
He said the next 12 months will be heavily impacted by inflation and what the RBA needs to do to get it under control.
“While adhering to the broader commentary both within Australia and internationally, 2023 will be a year to be cautious,” he said.
Mr Walsh hopes that inflation will be brought under control and the macro events impacting the country will ease, but says it is likely that the industrial market will remain at current value levels assuming there are limited interest rate increases, although with the recent inflation figures released, it would seem all but certain that we will see another rise.
He said, “Until stability returns to the broader market environment, we are of the view that transactional activity (excluding the institutional space) will remain lower than normal.
“It is likely we will start to see the trading of assets within the institutional space as the various groups look to balance their funds.
“It is also anticipated that 2023 will see significant new industrial development, with Brisbane and Melbourne leading the way, however it is unlikely this will alleviate the supply shortage meaning that we’ll continue to see increasing rents in 2023.”
Sydney
HTW said the industrial market was one of the strongest performing asset classes in 2022, with capital value growth and rental rate increases all owing to consistently strong demand.
They said “it is too early in the year to tell the full extent of the slowing but we have noticed that there is a lack of sales in late 2022 and early 2023.
“Feedback from agents too is that there are few transactions.
“Our outlook for 2023 is further growth in rental rates and we forecast this trend to continue over the next few years.
“Location is considered to be a prime factor.”
Melbourne
HTW said, “This current environment of rising interest rates and inflated construction costs has led to a slow in sales volumes, whilst much of the currently available industrial warehouse space is still under construction with very limited existing stock available.
“The market will welcome a record year for development completions in 2023, meaning we could potentially see that imbalance corrected, solving the undersupply and in turn lowering levels of demand, meaning there is scope for potential softening in capital values in the market.
“We can expect to see more surging rental growth throughout 2023 which has provided an offset for the outward yield shifts since interest rates began increasing and has been the reason capital values have stayed so steady” they said.
Brisbane
HTW said, “Retrospectively, the industrial sector was the strongest performing across all asset classes in the Brisbane market with yields compressing to record lows throughout 2021 and into 2022.”
“It would be overly pessimistic to say that Brisbane is in for dramatic changes in 2023, however the market will no doubt experience a softening in comparison to the previous two years.
“Demand is still strong for industrial assets with the owner-occupier market being an outstanding performer in recent months.”
Adelaide
HTW said, “The historically low industrial vacancy rates look set to remain for the foreseeable future as the high construction costs have mooted many industrial construction projects across Adelaide.”
“Industrial net face rents will likely continue to increase slowly and industrial yields will soften and result in a holding or some reduction in industrial values across metro Adelaide.”
Perth
HTW said, “The clear lack of supply in the market, both in respect of development-ready land and contemporary built-form facilities, is likely to hold the key to the sustainability of the industrial market performance in 2023.”
“We envisage activity in the owner-occupier market to remain steady in 2023 given the limited stock of large scale and quality premises available which has been compounded by construction industry challenges.”
Darwin
HTW said, “The dawn of 2023 sees the industrial property market having an important part to play in the NT Government’s plan to transform the Territory into a $40 billion economy by 2030.”
“Darwin’s industrial property markets have still not recovered from the completion of the construction phase of Inpex in 2015, at which point demand for industrial accommodation largely dissipated.
“It is only when one or more of these new major projects really gains some traction can we expect to see an improvement in market conditions.
“Whether that it is in 2023 or some time beyond remains to be seen” they said.
