If you build it, they will come

A few years ago, it was unheard of for owners of industrial land in Western Australia to begin development on a project without having a tenant in place.

Speculative builds were confined largely to industrial markets in the eastern states, where owners could see a benefit bringing tenants in later in the process.

However, as real estate firm Cushman & Wakefield’s head of industrial and logistics Nick Goodridge explained, the trend has gained prominence in WA recently.

“The east coast speculative market has been very strong for a long time, and probably more so since COVID,” Mr Goodridge said.

“Not dissimilar to Perth, all the eastern states markets have been very land-starved, so groups have been hunting and acquiring land in order to build core product.”

Research by Cushman & Wakefield found that 133,636 square metres of industrial space was being created in Perth this year without pre-commitments from tenants.

Mr Goodridge said the rise of institutional ownership of Perth’s industrial property in recent years was a key factor in the step-change.

“In the last five years we’ve seen a real growth in the ownership structure [of industrial property],” he said.

“If they [institutions] have opportunities and they’ve got land in core positions, they will build a cookie-cutter warehouse rather than wait.

“Whereas the privates in our market … will build it for their customers and backfill the product they’ve got.”

Historically, the state’s industrial market has been controlled by a handful of family businesses, including the Taddeis, headed by Julie Drago, Coxons, Hodgsons and Oosterhofs.

However, institutional ownership is growing, with Dexus, Charter Hall, Centuria and ESR Australia each owning significant slices of the state’s industrial property.

Mr Goodridge added it was not only the large funds undertaking speculative builds, with some private operators following suit.

Institutional moves

The arrival of Dexus in Perth’s industrial market in late 2021 with the $1.3 billion purchase of Jandakot Airport and surrounding land announced it as the single largest owner of industrial land in the state.

The company is undergoing a speculative (spec) build program across more than 42,000sqm of space in Jandakot, including a 26,000sqm warehouse at 8 Centurion Place.

Speaking to Business News, Dexus head of industrial capital transactions and development, Chris Mackenzie, said the company was adopting its national approach in WA.

“We always have a strategy of always having a spec build on our estates nationally,” Mr Mackenzie said.

“Generally, we look at spec space as well as pre commit.”

Dexus has developed a 27,716sqm warehouse for Amazon, another at 16,622sqm for Hello Fresh, and 14,256sqm for Marley Spoon at Jandakot as part of its plan to deliver an additional 360,000sqm of industrial space on the 80 hectares surrounding the airport.

When the group acquired the property, there was an existing 360,000sqm of industrial space, which Dexus intends to double.

Industrial vacancy rates in Perth are sitting at about 1.3 per cent, while average rents are at about $135/sqm, Cushman & Wakefield reported.

WA has recorded some of the fastest rental growth in the nation, about 25 per cent over the past two years.

While rental growth has slowed and vacancies have risen slightly this year, the industrial market remains characterised by low supply coupled with high demand.

Mr Goodridge said a lot of landlords were taking the risk of building on spec because they envisaged rental growth upon completion of assets.

“If you’ve got land and you’re building on spec [and] it takes you 12 months to build, the rent you’re getting at completion of the building versus start of completion could be 20 per cent higher,” he said.

“There is really strong, underlying demand, and they are getting fantastic rents [with] record rates across most precincts.”

Barings broke ground on its first WA industrial facility in Hazelmere this September.

Mr Mackenzie said he expected rental growth to continue while supply was so low across the country.

“The Australian industrial market is about one hundred million square metres of space,” he said.

A lot of tenants are still a bit jumpy about the market [and] are leaving their decisions much later as to whether they’re going to expand or go into new facilities,” he said.

“This is where the spec development, or build to lease, gives you that opportunity to have something available.”

Property fund giant Centuria Capital Group is set to be the first institutional developer to complete a major speculative build, with a 12,300sqm warehouse in Canning Vale.

The $31.1 million facility is almost complete, after Centuria bought the 204-208 Bannister Road asset for $10.1 million in mid-2022.

At the start of this year, Centuria head of industrial Jesse Curtis said WA was a standout performer in terms of rental growth, as its rents caught up to other parts of the country.

“Perth is seeing a strong tenant interest from e-commerce, transport and logistics, and distribution centre tenants as we start to see e-commerce users invest more in their warehousing to provide that speed of delivery and proximity to their customers,” he said.

Mr Curtis added that the company had decided to build the Canning Vale warehouse without any pre-commitments from tenants.

“We expect users of the Bannister Road development to be linked to e-commerce market,” Mr Curtis said.

“We’re marketing the property for lease, and we’ve got strong interest. We’ve been in no rush to lease it because of the rapid rise in leasing market.”

Sydney private equity group Barings, which rebranded from Altis Property Partners at the start of October, broke ground on a $60 million warehouse in Hazelmere last month.

The development, following the acquisition of the site by Altis late last year from McMahon Burnett Transport, marks Barings’ first foray into WA.

Barings project director Stephen O’Connor told Business News the company was drawn to Perth for its strong leasing market, high migration rates and dominant mining sector.

“We’ve got some really good conviction in the Perth leasing market at the moment,” Mr O’Connor said.

“That came off the back of a lot of research we’ve done, not just into the deals that have been done recently in Perth, but the rate of the economic growth and migration that has come into Perth.

“We also track the mining exploration spend, because while e-commerce has grown and traditional warehouse and logistics are growing, a lot of the tenants are still mining-centric.”

Rental costs in terms of dollars per square metre would continue to rise in the near future, he said, but not at rates experienced in recent years, particularly the past 24 months.

“It has certainly slowed, but I think we’re still going to see rental growth above five per cent, which is above the 10-year average,” Mr O’Connor said.

“A lot of that has got to do with the supply.”

He said Barings’ Hazelmere warehouse was positioned to attract tenants in mining exploration work.

Local drivers

Adrian Fini and Ben Lisle-led developer Hesperia has emerged as a significant player in WA’s industrial property space in recent years.

The group is part-way through building a 10,000sqm warehouse on Stirling Crescent in Hazelmere, where it has taken a speculative approach.

The firm’s managing director, Mr Lisle, said as supply of industrial property became scarcer in WA, landlords were following eastern states markets and adopting speculative builds.

“If you build something without a tenant, ready to go, you could be sitting there with that capital out for a period of time [while the building is] empty,” he said.

“In smaller markets, you tend to see less speccing [speculative builds] for that reason.

“But in a tight market it can make sense where people are struggling to access existing property. Then, having a spec property ready to go … means people are likely to want to take it up because their options become very limited.”

Mr Lisle said Hesperia had weighed the risks before pushing ahead with development of its Hazelmere property without pre-commitments in place.

“In the context of that investment vehicle it was a relatively small investment, so it wasn’t going to hurt too badly if it didn’t get taken up quickly,” he said.

“We took a view that tight market conditions meant trying to bring some more supply forward made sense.”

Perth-based syndicator Realside Ovest is building 12,000sqm of warehouse space across two sites in Kewdale, where it owns close to 26,000sqm of industrial property.

Realside Ovest managing director Julie Drago told Business News these developments marked the first time her family had done a speculative build in its two decades in the industry.

“We are doing it because we need to deliver the profits for our investors, but also the fact that we’re very confident of the quality and the design of our build [and] that we’ll be able to lease these buildings quite easily,” Ms Drago said.

She said because the company worked with her brother Stephen Taddei’s Micon Construction, it was somewhat protected against the rapid construction cost increases affecting the industry.

“We are a bit buffered from the construction price increases, given that we build internally,” Ms Drago said.

“Our developments are stacking up commercially, because we’re able to build quite economically at the moment [and that] is helping.”

Ms Drago added that industrial owners were prepared to take on more risk than before, while the forecasts for rental growth were strong.

“You may do a pre-lease and lock someone in on a rent now, but who knows where the rent is going to be in 12 months when you deliver it,” she said.

“People are taking that risk, rather than lock someone in now at $130 [per sqm]. Who knows if they [could] be $160 in 12 months if these vacancy rates continue and the market goes where everyone thinks it is going to go?

“There might not be the pre-lease briefs out in the market, but there’s still underlying demand from people wanting existing space, so I think that’s what’s driving it.”