Over the last three years, annual gross take-up has exceeded one million square metres in Sydney’s industrial market, well surpassing the 10-year annual average of 686,000 square metres. The level of take-up across the Sydney industrial market is unprecedented.
What is driving this record-breaking take-up?
Multiple factors have contributed to the strong level of activity. Higher e-commerce penetration rates, occupiers seeking to gain efficiencies across their real estate footprint, and the withdrawal of industrial assets due to residential development activity, have generated fresh activity in the market.
Transition towards online spending
Retail trade has become a more prominent driver of industrial take-up in recent years, partly led by growth in e-commerce. Annual online retail sales are currently AUD 24 billion (US 19.2 billion) as at November 2017, up from just AUD 13 billion (US 10.4 billion) in 2012.
We believe the e-commerce-led expansion will continue to accelerate given the recent entry of some of the world’s largest online retailers to Australia. Due to the growth in online spending, retailers have looked to expand their distribution capacities, driving take-up from the retail, transport, postal & warehousing and wholesale trade sectors to 74 per cent of total area leased in 2017.
Table: Industry type take-up activity in Sydney (sqm)
Source: JLL Research
Efficiencies of consolidation
The average area leased has risen by 14.7 per cent between 2012-2014 to 2015-2017, from 11,600 square metres to 13,300 square metres, based on leases signed. The increase is reflective of structural change in the market, where corporates are seeking efficiencies through the consolidation of their operations. Many tenants are consolidating from multiple sites into one larger asset. In many cases, tenants have consolidated from infield sites which were redeveloped for alternate use.
Withdrawals of industrial assets for conversion
Over the last five years, the strong Sydney housing market drove a high level of withdrawals from the industrial sector, with many sites rezoned for residential development, particularly in inner-urban areas. These withdrawals contributed to a wave of occupier activity as displaced tenants looked to secure new locations for their operations. In the Sydney market, the proportion of sales transactions purchased for conversion since 2013 has grown rapidly, totalling 1.5 million square metres, or AUD 1,986 million (US 1,588.8 billion) in sales over the past five years.
As online retailing continues to grow, we believe high levels of gross take-up will continue, given the structural changes currently taking place in the industrial sector.
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