The media releases by Amazon and their warehousing partner Goodman Group are reported by heavyweights Fairfax and News Corp. as news from the big end of town. The headlines are huge fulfilment centres in Dandenong of 24,000 square metres and in Moorebank in Sydney’s south-west of 43,000 square metres. Does industrial real estate get any better than this?
Well, yes it does get better than this. We spoke to Barry Cawthorn CEO at industrial real estate specialist Bawdens who says, “There is a sweet spot in the mid-sized industrial property market between 2000 and 3000 square metres. Warehouses of this size have produced capital growth of 75% over the past few years.”
Overall this mid-size industrial property segment has given a much better investor return than that achieved by the large industrial REITs (Real Estate Investment Trusts).
Barry goes on to explain, “The focus on large end logistics has taken resources away from small industrial developments resulting in a lack of small industrial properties for sale as well as putting pressure on industrial rents. This situation is the result of cheap overseas money driving investment in over-sized warehouses.”
The annual report of global industrial REIT Goodman Group numbers look great. This is however more about share price marketing than industrial real estate insight. Like-for-like rent growth of 3.2% for Goodman Group are underwhelming compared to Commercial Property Guide’s Asking Price industrial rent growth of 8% for SME industrial properties for the same period.
Industrial Property reflects the Health of the Local Economies
The demand for industrial property particularly in Sydney and Melbourne is driven by the business need to have affordable warehousing facilities located a short delivery distance from customers.
While inner city industrial properties are attractive from a logistics and quick delivery fulfilment perspective, high inner city rents means there needs to be a compromise between distance from consumer and warehouse rent prices. Usually cheaper rents with acceptable delivery times is the business decision. In a new trend overseas, for example in New York, industrial properties have gone multi-story to make better use of the scarce prime locations.
There is still a substantial majority of traditional requirements for industrial properties, despite the rise in online fulfilment. Typical would be food manufacturers who need to be close to their regional markets but still conscious of rent costs. The industrial warehouse with a co-located administration office is a requirement and in strong demand. This is the world of the SME that is at the heart of industrial real estate.
Industrial property can be thought of as 3 market segments: small – up to 1500 sqm, mid-size 1500 to 4000 sqm and large – greater than 4000 sqm which also includes the huge Amazon-like facilities.
Building regulations place requirements on industrial developments for minimum standards for facilities and amenities such as carpark spaces. Generally these are seen to meet the needs of most industrial tenants. Industrial zone regulations also place limits on consumer facing businesses.
New industrial developments ensure that sites are not undercapitalised. So buildings occupy a large proportion of the available land area. The days of large yard spaces are gone.
Economic activity in our major capital cities is all around us. Infrastructure builds and new businesses all requiring to be supplied with warehoused tools and materials. There is a direct connect between the growth in GDP and the lease demand for industrial real estate.
Expert Insight required by SMEs
SMEs require access to the same level of industrial property management skills as that available within the publically listed REITs. The days of the local residential real estate agency “looking after” an industrial property as part of a mainly residential investment portfolio no longer makes sense.
The economics of scale and the development of expertise within a large portfolio of managed industrial property is what is need to ensure both landlords and tenants receive the highest quality service and information. For example Barry Cawthorn tells the story of a landlord who tried his hand at DIY property management. He enthusiastically agreed to the tenant’s expansion request to add a mezzanine level. They retained a good tenant – what could go wrong? At the end of the extended lease the tenant eventually moved on. The lease however had not been updated to require the tenant to remove his alteration. Thus the building was unattractive to prospective tenants without the costly removal at the landlord’s expense. The landlord now has a specialist industrial property manager after an expensive lesson.
For SMEs, sale prices have risen so quickly in the last couple of years that the pendulum has swung back in favour of leasing rather than the clear benefit of purchasing that existed a couple of years ago.
The publically listed industrial REITs have a great story. There is a much better one – the ”sweet spot” of SME industrial workspaces, driven by four factors:
- Solid economic fundamentals
- New developments won’t catch lease demand anytime soon
- Industrial Rents are going up
- Biggest challenge is finding available properties.
So SMEs need access to industrial property expertise and experience to stay ahead of the game, something that was only available to the big end of town not so long ago.