Downward pressure on industrial rents

Rental growth in Western Australia’s industrial sector is expected to cool off, as landlords face resistance from tenants grappling with affordability constraints.

This was one of the messages at today’s Property Council of Australia WA Division lunch, where CBRE head of industrial and logistics research Sass J-Baleh pointed to WA’s strong rental growth.

“A lot of demand has translated to vacancy rates trending down,” she said.

“Australia is currently at 0.8 per cent [industrial rental vacancy], which is the lowest globally, and if we look at that pre COVID it was about 4.5 per cent.

“When we look at what’s driving that it’s the Sydney and the Perth market. Sydney is at 0.3 per cent vacancy followed closely by Perth at 0.5 per cent.”

She added that the rapid decline in vacancy rate had resulted in strong rental growth, with national super prime average rents year-on-year growing at 19 per cent nationally year-on-year.

“If we look at Perth, that’s much higher, at 24 per cent year-on-year growth for super prime grade assets,” Ms J-Baleh explained.

Ms J-Baleh said the demand for industrial space was still strong across Australia, driven by growth in population, e-commerce, in consumer staples and a reassessment of inventory levels by major players.  

WA has been described as one of the most constrained industrial markets in the world, as demand continues to outweigh supply and companies continue to expand their logistics requirements.

But Realside Ovest chief executive Julie Drago said rental growth was threatening this expansion, given its impact on tenants’ bottom lines.

“There is only so much people can afford to pay,” she said.

“We are at a tipping point now, where companies are coming to us and saying they can’t afford the rent.

“There is a real disparity between supply and demand at the moment and that’s what’s driving this rental growth, but the fundamentals have got to come down too because businesses have got to be able to afford to pay that rent.”

Ms Drago added that if businesses could not sustain the high rents, it could result in them limiting their expansions, having an ultimate impact on demand.

“If businesses can’t sustain it, they’re not going to go into more space,” she said.

Perth Airport chief property officer Dan Sweet said he thought growth in demand and in turn, rental prices, was poised to continue.

“I can’t see it slowing down, I really think this growth is going to continue and this industry will ride the wave of that,” he said.

“I think the biggest problem facing the industry is that supply side.”  

Panellists agreed that the environmental, sustainable and governance (ESG) requirements of the industry were also posing affordability risks.

Westport managing director Patrick Seares said the port was aimed at becoming the world’s first regenerative port, as “sustainability was no longer good enough”

Dexus WA development manager Steve Kelly said though tenants desired sustainability credentials, they rarely wanted to pay for it.

“The environmental and sustainable component is one of the first things we try and do, but the type of thing we are finding now is you put all these in, insulation, solar array, get it to a five-star standard, and then you show them the rents and then people say ‘no that’s too much’,” he said.

“It’s the first thing that tends to get pulled out of.

“If these tenants want [sustainable buildings], they’ve got to pay for it.”

Aurizon general manager Anna Dartnell said one of her group’s main concern was working to electrify its locomotive fleet and to look at future energy sources.  

“A lot of the work is speculative, but what we are working heavily in is how we can take the locomotives and future proof them,” she said.

Property Council of Australia WA Division executive director Sandra Brewer said high demand coupled with limited industrial land supply had the potential to hold back WA’s future growth.

“Industrial land security and capacity is essential to continue to facilitate a growing manufacturing sector, elevated levels of e-commerce, while also providing facilities to mitigate global disruptions,” she said.

 “For WA to lead as a competitive industrial market, industry and government must collaborate to ensure land supply is well serviced by road, port, and freight infrastructure, and in locations that meet business needs.”

She added the Property Council was working with the Industrial Lands Steering Committee to identify pathways for industrial land growth.