The Industrial Market Is Tight, But Tenants Still Have Options. Here’s What We Want You To Know

June 28, 2022
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Commercial Real Estate

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Sophia Bockisch
Sophia Bockisch
Manager

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The industrial market has had yet another rollercoaster year. But, though the outlook looks grim from the outside, we want industrial tenants to know that they always have options.

Read our tips below on achieving the best commercial outcome in a tight market.

But first, a market overview

Across Australia, the industrial vacancy rate is currently reported as sitting at 1.3%, the lowest in a decade. Vacancy is even lower along the east coast (dipping by 44% compared to last year), with Sydney the tightest held market at 0.4%. However, new figures to be released next month will show vacancies across the nation have dropped to 0.8% — a record low — with Sydney's rate forecasted to contract a further 0.1% to just 0.3%.

Off the back of this, rental growth across the major cities for prime industrial assets is accelerating, expected to rise by an average of 11% this year, a 6% increase on 2021 levels. Not surprisingly, Sydney led the way, recording 11.9% y-o-y growth to the end of Q1 2022, followed by Perth (11.1%), Melbourne (8%), Adelaide (3.2%) and Brisbane (1.7%).

Average industrial incentives have also ticked down across the board. Official figures report incentives in Brisbane and Sydney to be sitting at 15.5% and 12.5%, respectively, with Melbourne figures withheld. However, these levels are much higher than what our team sees on the ground. In our experience, incentives offered have been far lower. It really depends on the asset, location and the tenant, with some landlords going to lengths to secure quality occupants on long leases.

Where’s the demand for industrial space coming from?

The e-commerce boom continues to drive the demand for tightly held warehouse space across Australian cities. This year, retail sales have reached their highest level on record, with March trade increasing 9.4% compared to last year, increasing 1.6% month-on-month. 

What’s more, disruptions to the supply chain have sparked freight delays and hindered the availability of materials and products. This has forced businesses to pivot, quickly scaling up their operations to improve efficiencies or create more space for inventory.

While the consumer shift from buying goods to spending on services has begun, the demand for household goods and clothing remains elevated. So does the need for packaging, logistics, inventory resilience and delivery support. So, many outlets are forecasting that the market will have a sustained appetite for industrial assets in the future. However, on the contrary, our Managing Director, Tim Green, believes a perfect storm is brewing for a collapse in demand for warehouse space. You can read more on that here.

Industrial Market Overview | Warehouse Space

What about new supply?

Developers are looking to support demand by bringing on a new supply stream, with 2.7 million sqm planned for 2022. However, much of this stock is already pre-committed. And labour shortages, price rises, difficulty in sourcing materials and the rain along the east coast have delayed many projects by up to six months.

And, according to the Urban Developer, Australia needs twice as much industrial floor space as it is building to keep up with demand.

Does that mean there are no options for industrial tenants?

No! Fear-mongering by agents and the media has left many industrial tenants thinking that they have no option but to renew at their current premises, meet landlord demands and accept no incentive. 

But, that’s simply not the case. 

Here's what we want industrial tenants to know:

Time is of the essence

This is our most valuable piece of advice. And we can’t stress it enough.

Allowing enough time gives you the room to understand your requirements and negotiate effectively. It also enables tenants to consider upcoming lease expiries, greenfield sites and built-to-suit options with a longer lead time. 

We recently assisted an industrial client in South Sydney who pre-committed to 16,000 sqm office/industrial space for a new build. Though South Sydney is one of the tightest markets in Australia, after combing through lease expiries and upcoming stock two years in advance, we locked in a greenfield option for our client at better terms than the market currently offers.

Though the amount of time needed to secure a great deal is heavily based on circumstance, we recommend starting within the following time frames. 

Keep in mind that the earlier you start thinking about it, the better.

Get to know the market 

Don't just believe the landlord-driven stories that are saturating the media, saying there's nothing available and that you have no options. Educate yourself or get an advisor who understands the market.

Tenant CS currently has briefs out in Milperra (for 2,000-3,000sqm), Silverwater (for 800sqm & 2,000sqm), and Huntingwood (for 4,000sqm). For all of these briefs, we've compiled long lists of over ten options which meet our client's requirements.

This goes to show that, though limited, there is stock available. You just need to know where to look (or work with a professional who does). 

Adopt opportunity-driven decision making 

If you have an upcoming lease expiry and you're in a bind, make decisions that will create opportunities for you in the future. 

We worked with a client to renew the lease at their existing premises but negotiated the ability to assign or sublease their space. With this clause in play, the tenant can keep searching for their dream premises without the pressure of a lease expiry and with the view of subleasing or assigning their lease in the future. 

Sublease or assignment is a great option which can be finalised relatively quickly with the right network. For instance, we recently completed a 2,000sqm sublease project in Silverwater, which was subleased within two weeks before it even got a chance to hit the market. 

So, be on the lookout for opportunities throughout the lease tail, even if the options do not align with your lease expiry. And make well-informed, strategic decisions that create opportunity. Better yet, work with a tenant rep who can uncover hidden opportunities in a challenging and complicated market, and do the legwork for you. 

Loyalty doesn't pay off

Loyalty is often instinctual. But, when it comes to commercial real estate, it's not rewarded. In most cases, staying loyal to your landlord actually leaves you worse off. That's because landlords tend to offer existing tenants less than they would to secure someone new on a long-term lease.

We recently worked with an industrial tenant who considered staying put. Our client was offered 5% (later negotiated up to 8%) off the bat because the landlord knew they had a tenant rep in their corner, levelling the playing field in negotiations and searching for alternative market options to create competition. Other industrial tenants within the same site who renewed directly with the landlord were offered zero incentive because they had no leverage. 

One of the best ways to avoid the loyalty trap is by working with a professional who will provide a buffer between you and your landlord and ensure you secure the same deal as an incoming tenant. The mere presence of a tenant rep sends a message to landlords that you mean business - that you'll be exploring all opportunities and that you have someone on your side who understands the market and the nuances of negotiations.

The tide may be turning

Though the media claims that Australia needs twice as much industrial floor space to keep up with demand, our Managing Director, Tim Green, believes the tide may be turning and industrial rents will fall by 10-15% by 2024.

Let’s talk

While the industrial sector's challenges may seem daunting, we want tenants to know that they are not insurmountable. However, getting an experienced and dedicated tenant rep on your side is more important than ever.

In a tight market, creating competition for your tenancy becomes the great equaliser in negotiations. And utilising a tenant rep does precisely that.

Tenant CS will work with you to explore all options (including off-market opportunities) and fight tooth-and-nail at the negotiating table to protect your interests.

We only ever represent tenants, never landlords, and because of that, we get better results.

Level the playing field and get in touch with the team today to see how we can help you.

Sophia Bockisch has more than 4 years experience as a Tenant Representative, working across the APAC region. Originally from Germany, she started with Tenant CS in Singapore before moving to Australia and now specialises in helping commercial and industrial tenants negotiate competitive leases.

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We're market experts, fierce negotiators, proudly independent and conflict-free, securing you the right outcome on the best terms ⁠– every time.
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