As interest rates continue to rise, the industrial property landscape is slowing, a report from Herron Todd White has revealed.
The independent property valuation and advisory company’s July Month in Review report shows that industrial property activity is slowing, following record sale prices and an increase in listings across the country during the past 12 months.
Herron Todd White uses an industrial property clock to display market conditions. The peak of the market sits at 12 o’clock, a declining market sits at three o’clock, bottom of market at six o’clock and rising market at 9 o’clock.
The results show Brisbane, Gold Coast, Sunshine Coast and Ipswich at the peak of the market (12 o’clock), while areas such as Alice Springs, Darwin, Orange, Central Coast and south-west Western Australia sitting at 3 o’clock (declining) market and areas such as Byron Bay, Melbourne, Adelaide, Sydney and Newcastle at 9 o’clock (rising). No areas were sitting at the bottom of market.
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Herron Todd White commercial director David Walsh (pictured above) said the market was likely heading into a phase where there would be a noticeable disconnect between vendor expectation and market value.
“Industrial leasing continues to be strong which will no doubt become more of a focus for agents,” Walsh said. “Looking at new construction activity, there are four key fundamentals that determine the feasibility of an industrial project, being land cost, construction cost, rents and yields.”
Walsh said land cost was the cost of the site which had a major influence on a project’s bottom line.
“This factor has risen to all-time highs across most industrial markets at present,” he said. “Demand is simply outstripping supply, so premiums are being paid to secure land suitable for development.”
Walsh said the construction cost input had become a “runaway train” over recent months.
“Build costs were stagnant for some time, but global instability affecting the supply of materials coupled with rising labour rates have put a serious dent in the bottom line of new development feasibilities,” he said. “We’ve seen the price of construction increase by around 30% to 40% over the past 12 to 18 months.”
Walsh said the end value of any commercial property prospect was directly related to market rent.
“Having a finger on this pulse is essential when doing your numbers,” he said. “Rents in industrial, as a general observation, have been stagnant for over a decade. This has begun rising recently but that’s mainly been for prime space in prime locations that allow for a more corporate offering.”
Walsh said yields had been at record lows with industrial investment being hugely attractive during the pandemic.
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“These tight yields have translated to premium purchase prices which has been helping mitigate feasibility risks because of increased land values and construction costs,” he said. “Yields have now peaked in this cycle and are beginning to soften due to interest rate increases. We’ve already seen situations where acquisitions that were agreed in principle prior to interest rate rises are now beginning re-negotiated.”
Walsh said these factors had slowed the initiation of new development in industrial sectors across many centres.
“Buyers who purchased an industrial site in late 2021 or early 2022 and had a ‘healthy’ feasibility at that time are now going to tender only to discover build prices are much higher and yields are starting to soften,” he said.
“These elements, coupled with higher site values, reflect a much lower profit margin in their cashflow analysis which is bad news if you’re seeking funding. These challenges will only become more difficult in the near term and as such, expect plenty of projects to be shelved in anticipation of normalising construction costs, hopefully in 2023.”
