What we're experiencing right now is almost a perfect storm: arguably the strongest demand characteristics the market has seen for a long time and a significant shortage of supply. It's a bit of a fight between tenants for some of the better offerings that are in the market.
Rebecca Kent
A year ago, warehouses were being snapped up by businesses racing to keep up with the massive surge in online retail triggered by COVID-19 lockdowns. The expectation was that as the pandemic eased, so would the demand for industrial real estate. But as it turns out, that is far from the case. I’ve asked two JLL experts to tell us more.
Matt Lee
My name is Matthew Lee. I jointly lead the industrial occupier services team here at JLL. At the moment, the biggest challenge that we're facing is quite simply that we're running out of stock. We're finding tenants are coming to us and the traditional number of options that they would have to choose from or to consider is just simply not there.
Allan Frydman
My name is Alan Frydman. I lead the supply chain services team at JLL. We help our clients understand what their requirements are from a supply chain perspective and then translate that into property requirements. Most of our clients only do this sort of once every 10 or 20 years.
Rebecca Kent
I’m Rebecca Kent, host of this JLL Perspectives podcast.
So Matt, the industrial market has thrown you a bit of a curveball this year. What’s the story?
Matt Lee
A curveball is probably the right term. We came off the 2020 COVID-19 year with the expectation of a slowdown. But we had a unique situation whereby the actual enquiry volumes sped up, and the only thing that slowed down was the delivery of new stock into the market. So, what we're experiencing right now is almost a perfect storm. We've got arguably the strongest demand characteristics the market has seen for a long time and a significant shortage of supply. You couple that in Sydney with a shortage of land as well in the near term and what you're finding is that we're short on options for people and it's a bit of a fight between tenants for some of the better offerings that are in the market.
Rebecca Kent
So, we all jumped online to shop peak COVID-19, including people who had never shopped online before. But the expectation was that there would be some let-up in that demand by now. Is that right?
Matt Lee
We're seeing everything from traditional grocers, so Woolworths and Coles, expanding rapidly, right through to newer players in the market, whether they’re coming from Asia or elsewhere overseas, looking to set up operations here in Australia to distribute products that are purchased online. And they can be small, medium, large, cheap or expensive, it doesn't matter. But I think the one thing that probably wasn't expected is A. how quickly the adoption has happened, and B. the real pause on supply. We're finding ourselves in a unique situation where people are now trying to fast-track developments and fast-track planning to get the product into the market to capture some of this demand.
Rebecca Kent
Just expand on the profile of some of the businesses looking for space and how that’s evolved.
Matt Lee
The cross section of the market at the moment is really interesting. COVID-19 really helped to streamline the various market segments and give us a much clearer picture. So obviously, off the back of COVID-19, the need for food, the need for pharmaceuticals has been expansive. So we're seeing a significant number of those requirements. People's ability to use data has continued to grow exponentially, so we're also doing a lot of data centre work.
But then we're also seeing that e-commerce piece, that last-mile piece and there's a whole range of names there that certainly I wasn't familiar with until the past 12 months or even six months. For example, Winit, a Chinese-originated company that took a large portion of the Dexus development at LOOP. There are also groups like ECOF, another Chinese e-commerce provider, along with the traditional names.
Rebecca Kent
Allan, what’s your take on the industrial supply squeeze?
Allan Frydman
It's quite fascinating. So, what we saw 12 months ago was that everyone thought the world was going to come to an end and industrial demand for retail skyrocketed. At the same time for industrial occupiers, their supply chains fell apart. So, with the first lockdown in China, there was a huge impact on getting components that people wanted to sell, or that people needed to make things. It had a real impact on the supply chain, so people couldn't get hold of finished goods. That coupled with an increase in sales, especially as people were working from home and coming forward, meant that inventories wore down quickly. And they've still not quite recovered from that.
We're now seeing among some of our major customers record inventory holdings, but still significant out of stocks. They're just trying to get their hands on whatever they can get so they can continue to build up their safety stock. The just-in-time philosophy that people were working with before has really been put to the test. And people are realising it's not great having a two-week streamlined manufacturing window when we can see how disruption breaks our supply network.
Along with that is that the way people are working is changing. At first, we saw a rush for the home office and people buying computers, webcams, monitors, tables, office chairs and things like that. And we're now seeing more lasting changes in the way we work. There's still a lot going on at home and so with our customers that deal with home improvements, whether it's furniture, tiling, appliances, or anything, their sales are still skyrocketing, and they're still coming to us saying ‘give me more space, I need more inventory’.
What's holding them back from selling more is getting the stock. And then when they can secure stock, they want to bring in as much as possible. And that's leading into the storm that Matt was talking about. of customers coming in and going 'I need to get quality industrial space'. Talk about e-commerce growing and people needing more warehousing space, the businesses that deliver the e-commerce parcels, Aramex couriers, Australia Post, these type of people, they've seen a massive uptake in demand so they've needed to get more through their facilities in a much faster time. They're reaching the design limits of their existing facilities a lot more and they're rolling out new strategies very quickly to cope with this increased demand.
Rebecca Kent
Matt, in Australia, along the eastern seaboard, industrial vacancy is a very low three percent. How are you navigating that on behalf of your clients who are, as Allan says, at capacity in their existing space because they are holding on to more stock and dealing with elevated levels of online sales.
Matt Lee
The short answer to that question is that there's a lot of dependency on whether people have an unquestionable need for something at a certain time. For example, if someone is in the third-party logistics space and they have a contract that needs to be filled by a certain date, then they're really in a position where they have to take whatever they can get. What we're seeing more of now – and this is the work that we do hand-in-hand with Alan and his team – is that while some people have a requirement immediately, some people also have a requirement for the perfect outcome. And that perfect outcome might mean a delay, it might mean a lease renewal, it might mean a little pause, while Alan and his team do their work and determine exactly what that business needs to deliver the ultimate operational model.
Rebecca Kent
I looked at JLL’s recent industrial investment review and outlook report and was surprised at the supply demand issue given that the amount of warehouse space built last year in Australia was more than ever at 1.4 million square metres.
However, I did also learn that demand is more than double that and that for AU$1 billion increase in online sales, an additional 70,000 sqm of warehouse space is needed. That’s massive.
In any case, I understand that at least in Sydney, there are acres and acres of land available in the outer West. For businesses, is it just a matter of waiting until that’s built up?
Matt Lee
That's a good question. For large scale warehousing, the Eastern Creek, Erskine Park area has been a focal point in Sydney for quite some time. The natural progression now is between Erskine Park and the airport where there are hundreds of hectares of industrial land that's either zoned or will be zoned over the next few years. So, the land supply in outer Western Sydney discussion will change significantly.
Those supply numbers you talked about earlier, that's an interesting one, because we're now in an in-between period. So those supply numbers for 2020, a lot of that was conceived before COVID-19. And what we're seeing now is the numbers for late 2020 through to mid-2021 are going to be the ones when the COVID-19 slowdown on development was, so I think you're going to really see the next couple of JLL research reports reflect that.
As for Kemps Creek, we're running four or five, probably more, large-scale industrial requirements in Sydney. And I would say a good chunk of those are going to end up in Kemps Creek. That being said, at Kemps Creek, the land has only just been zoned. It's not yet serviced, the roads aren't finished. And they've already concluded several major leasing transactions in the region, anywhere from 10, 20 up to 80,000 square meters. That goes to show you that the demand is definitely there. Those will be late 2022 late delivery projects.
But, a lot of our clients have focused on being closer to the city rather than further away. Kemps Creek is still many kilometres from the city. And whilst it's logistically a good spot for north-south, as in delivery to Brisbane and Melbourne, to deliver stuff to metro Sydney from Kemps Creek would be a very expensive exercise. So, what we are starting to see now is the regeneration of brownfield sites. We've seen Dexus do it at South Granville with LOOP, we're seeing Mirvac doing the Switchyard at Auburn, and they're having some fantastic success.
So, we are really seeing a push now where people are prepared to pay for that privilege, which hasn't happened for quite some time. We are starting to see rents of $150-plus comfortably in some of those inner regions and even creeping up to high ones for some of the smaller space. That's purely because people want proximity to the city. They want to benefit from the West Connex and all those new infrastructure upgrades.
Allan Frydman
One of the ways of solving the limited supply is putting four warehouses on top of each other. Goodman has a development application in Alexandria with a multi-level warehouse. In Singapore and Japan JLL's been helping clients with multi-level warehousing for a while. For the last mile in New York, there has been a lot of repurposing of what's called infill sites, into multi-storey warehousing, flexible use, multi-tenant.
Rebecca Kent
So, the ability for businesses to make that last-mile delivery quickly is really at the crux of decision making.
Allan Frydman
There are a couple of factors. Anything time critical that has to do with repair or trade, for example, I'm looking at the laptop that we're doing this interview on, if that breaks, the laptop manufacturer has a service-level agreement to get that fixed within a certain number of hours. So, having that part available and distributed to the right point within a certain timeframe is critical. You've also got a lot of trades where they need to get to the parts on their sites in a time critical manner.
Regarding consumers and e-commerce. People talk about the same-day delivery promise whether it's 'I want same day delivery or I want next day delivery'. The successful e-commerce players deliver to they promise. So, it's more important that if you say it's going to arrive tomorrow, it does arrive tomorrow. You can even say it's going to arrive in a week's time, as long as it does arrive in a week's time. If we look at someone like Amazon and why they're growing so much, it's not only that they have mastered the delivering to promise, but that promise, that time, is very small. And the smaller that time window becomes the easier it becomes for people to order online and the easier it becomes for them to do their next order. I've ordered stuff on Amazon at 9pm and received it at 11am the next morning. You start going 'that's easier than walking to the shops'. It's all about the promise because when I look at that product, Amazon tells me I can have it in the morning tomorrow.
Rebecca Kent
Matt, are developers happily going out and building warehouses without having tenant commitments? What are the prospects for speculative development? The rents have got to be at the right place, I take it?
Matt Lee
I think it's been a regular feature of the Sydney and Melbourne and Brisbane property market for quite some time. So, I certainly think a return to normal speculative development levels is definitely on the cards. And if anything, I think you might see a boom in speculative development in the short to medium term off the back of all this demand.
I guess what's interesting are the two factors that we touched on before. If it's last mile infill, close-to-town development, then we're seeing developers needing to push some pretty strong rents, probably even to the levels that haven't been achieved before. So that's your first challenge there. If you're looking in that market out in the outer west, the unknown piece is that onset of new land supply.
If you look at Kemps Creek, for example, you've got half a dozen or so of the best developers in the market that are all going to be pitching very similar big-box industrial products into the same market in the same suburb. So, it's going to be interesting to see which strategies those parties take in order to see them through the development cycles. There are one or two parties that are a little further ahead with their planning and that may benefit them.
The rent growth thing is interesting. So I think if you're looking at true outer west - so Erskine Park, Eastern Creek and surrounds - for those agents that have been around a long time they’ve seen rents have only shifted $5 to $10 a metre over the past probably 15 years. So, to say there's been massive rent growth would be not true. But we are looking at a situation in the medium term before that Kemps Creek supply is fully realised, that there's going to have to be some pressure on rents and there's going to have to be some pressure on incentives.
But again, at the moment, we're looking at a unique set of market conditions that we haven't seen for quite some time.
Rebecca Kent
Alright, just a question for you both to wrap up. Allan, what’s one thing we’re going to see influence or shake up the industrial sector?
Allan Frydman
The biggest change that I've seen over the past couple of years, and this is going forward as well, is what's happening from the data intelligence side. People can transform sales data, delivery data, into predictive assumptions. Artificial intelligence is coming through. And they're able to better predict the requirements in the future. Does this come into how much inventory should I have? What products should I sell? Who am I targeting it to? Where is it coming through? And that's feeding back into the marketplace where a majority of people are holding more skews to focus their offering on more individualised people. The ranges of things they're storing to support that are growing and that's impacting space requirements in the industrial space.
Rebecca Kent
Matt, what about you?
Matt Lee
The biggest thing that's impacting us or the biggest trend we're going to see is just the importance of the supply chain. And that's not a new statement to make. But I think the level of importance that is required as decisions are made on industrial and logistics centred businesses, is all about the supply chain and understanding that supply chain. That can incorporate everything from where warehouses are, how products move to and from them, automation, etc. Quite simply, we're seeing that the groups that aren't across that or aren't up to speed with where the industry's at with that kind of thing is way behind.
And then the other piece you've already touched on from a true property sense is going to be the ability to deliver infill locations. I think if you went and asked a cross section of the top half a dozen developers, they're all on the lookout for infill locations because they know that demand is there. It’s not the same demand for a big box at Kemps Creek where you've got different competing parties. If you could source yourself a good infill location, so for example, Logos at Villawood. That’s probably a location that hasn't been at the forefront of people's thinking. Logos has done well: good product, good developer, and that's being considered an infill location.
Rebecca Kent
That’s Matt Lee and Allan Frydman therefrom JLL’s industrial and supply chain teams. And I’m Rebecca Kent. I hope you took away a few nuggets from this episode. For future nuggets, please do tap the ‘subscribe’ or ‘follow’ buttons on whatever platform you’re listening on. This will mean future episodes will very conveniently just appear in your podcast list. If you want to see what Matt and Allan look like, check out their photos, and biographies – along with past guests of this podcast at jll.com.au/perspectives-podcast.
