The Rise of Industrial Real Estate: Why Investors are Taking Notice

Picture this: just a few years back, industrial property was the forgotten sibling in the commercial real estate family. Warehouses and logistics facilities couldn't compete with the allure of swanky office towers or vibrant shopping centres. For most investors, industrial assets were an afterthought at best.

But then the pandemic hit, and everything changed. 

Industrial real estate shed its wallflower reputation and became the belle of the investment ball, outshining its once-favoured office and retail counterparts.

So, what caused this seismic shift? What factors propelled industrial properties from underdog to top dog? And is this newfound popularity just a fleeting trend, or is it here to stay?

I've spent weeks analysing the data to uncover the answers. 

Here's what I learned.

The Numbers Don't Lie

As of late 2023, Australia's commercial property market was worth a cool $219.7 billion. Not too shabby, right? The sector as a whole showed resilience post-pandemic, but here's where it gets interesting.

Historically, industrial property trailed behind office and retail in terms of market share. However, since COVID struck, industrial's slice of the pie has grown by 4%, while office and retail have seen declines. A 4% increase might not seem earth-shattering, but the fact that it came at the expense of traditionally dominant asset classes?

That's significant.

But market share is just one piece of the puzzle. To truly understand industrial's rise, we need to examine its performance compared to office and retail over the past few years.

Transaction volumes paint a telling picture. Across all commercial asset classes in Australia, transactions plummeted by 62% between early 2022 and 2023. However, while office deals nosedived by 73% and retail by 68%, industrial transactions only fell by 63%. This relative resilience speaks volumes about industrial's staying power.

Pricing and returns further widen the gap. Most industrial funds have enjoyed positive capital growth over the last two years, while office and retail have largely seen negative returns.

Vacancy rates and rents add another layer to the story. Industrial vacancies did rise by 7% recently due to new supply, but availability remains over 40% lower than two years ago and a staggering 70% below 2020 peaks. 

These tight markets have allowed landlords to aggressively hike rents, with premium industrial assets seeing 18% year-over-year jumps.

Investor Sentiment Remains Bullish

The performance numbers are undeniably impressive, but is this just a short-term pandemic anomaly? Or do investors see industrial's momentum continuing long-term?

Investor sentiment data paints a bullish picture for industrial. Despite overall commercial property cooling slightly due to interest rate hikes, industrial assets remain red hot.

At the end of 2023, the nationwide vacancy rate for industrial space was a mere 1.1% - the lowest of any country globally. Sydney's 0.5% availability is the lowest of any city worldwide. Talk about a tight market.

Gross leasing activity has slowed from the dizzying heights of 2021, but demand still exceeds the 10-year average rate. Tenants are clearly eager to secure quality industrial space.

This consistent appetite is reflected in sales data too. Last year, industrial properties accounted for a third of all commercial acquisition volume in Australia. That's a substantial chunk of the market.

Investor surveys for 2024 projections reveal optimism about continued capital growth exclusively for industrial assets.

Local investors aren't the only ones recognising industrial's potential. Offshore players are also jumping on the bandwagon. In the first half of 2023, 13% of industrial sales involved foreign capital, compared to just 12% for office and retail.

And we're talking big money here. In Q2 2023 alone, overseas investors poured over $2.8 billion into Australian industrial real estate, accounting for about 39% of total acquisition spending that quarter.

Looking Ahead

As we navigate Q2 of 2024, cautious optimism sums up overall investor sentiment in commercial real estate. Declining inflation and potential rate cuts will play a crucial role in determining future transaction volumes, long-term asset performance, and the strength of investor appetite.

One trend that appears likely to persist is continued rental growth for industrial properties, even if demand from logistics occupiers moderates somewhat in the future. The reason? E-commerce is projected to keep climbing, further increasing the need for prime logistics spaces serviced by modern transport networks.

Properties that can deliver on last-mile logistics capabilities while aligning with investors' growing focus on sustainability targets will be the ultimate prize assets in the industrial sector moving forward.