OPINION: Industrial Rents To Fall 10-15% By 2024

August 2, 2022
Commercial Real Estate


Tenant CS
Tenant CS

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Sydney's industrial and logistics market is now the tightest in Australia, with a vacancy rate of just 0.3%.

Several factors underpinned the spike in demand, including a surge in online spending, demand from consumers for a shorter time to delivery and supply chain disruptions, all of which meant more warehouse space was needed to store goods.

As a result, industrial rents, which traditionally have shown little growth, have seen a significant shift in recent years, even more so since the onset of the pandemic.

"Supply chain problems since Covid have forced most companies to build up stock levels to satisfy demand and circumvent the ongoing supply chain bottlenecks. Combined with shoppers moving online, it's created an insatiable demand for warehouses," said Tim Green, Managing Director at Tenant CS.

"Nationally, we estimate that our clients have increased their warehouse space by an average of 30% over the last two years to meet strong consumer demand and accelerated e-commerce adoption, and circumvent supply chain problems. This has resulted in double-digit yearly rental increases over both years and a vacancy rate of virtually zero," he said.

Industrial warehouse against a blue sky to illustrate industrial rents

However, though the media claims that Australia needs twice as much industrial floor space to keep up with demand, Tim Green believes the tide may be turning.

"Tenant CS is in discussions with several clients who are considering how the economy's slowdown (or possible collapse) will affect their future warehouse needs. Internal plans are being drawn up to run down stocks in anticipation of a significant drop in demand off the back of rapidly increasing interest rates."

"They also say their supply chains are improving, shipping and freight costs are reducing, and shoppers are starting to head back to bricks and mortar and away from online shopping, which is 10% down."

In Tim's opinion, a perfect storm is brewing for a collapse in demand for warehouse space, hence industrial rents.

"From our clients alone, we predict 200,000 sqm of sub-lease space will hit the market next financial year, all of which will be heavily discounted. This will have a flow-on effect on direct stock; competing with the distressed sub-leasing market rents nationally should fall around 10-15% by 2024."

"Most REITs must be predicting this as they are cleverly insisting on long leases on deals they are doing now to ensure as many leases as possible do not expire around 2024 when the correction is internally predicted to occur."

Inside industrial warehouse with forklift carrying boxes to illustrate industrial rents

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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. Even if Tim's predictions do not come to light, know that, even in a tight market, you have options and creating competition for your tenancy will be the great equaliser in negotiations.

Tenant CS provides tenant representation services exclusively to office, industrial and warehouse tenants across the Asia-Pacific. 

If you have an upcoming lease expiry in late 2023 or 2024, get in touch. We'll uncover opportunities in a challenging and complicated market, working with you to explore all options and fighting tooth-and-nail at the negotiating table to protect your interests.

We only ever represent tenants, never landlords. 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.

Read Tim's original article on LinkedIn.

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