E-commerce changing the face of industrial property

The boom of e-commerce and its likely shaping of consumer shopping habits for years to come is having a profound effect on industrial property.

Like the residential property market, and indeed the rest of the economy, the impact of COVID-19 on industrial property assets has fluctuated.

Australian commercial property asset values are expected to drop 4.5 per cent in the next 12 months as the economy battles economic sledgehammer of the pandemic and the implications of a major shift towards online commerce.

Staying in business is the biggest challenge. Almost 78 per cent of investors see tenant solvency and the repricing of assets as the biggest challenge facing investors amid the current health crisis.

Colliers International’s Industrial Investor Survey highlighted the mix of positivity, opportunism and wariness that currently pervades markets. It does, however, detail the resilience of the industrial logistics market as online consumption becomes, by necessity, the central mode of shopping.

According to the report, investors remain heavily focused on the Australian industrial and logistics market, with 89 per cent favouring the sector over other commercial sectors. 

Habits setting in

Colliers International industrial managing director Malcom Tyson said the exponential growth of e-commerce had prompted a number of occupiers to take additional industrial space to match online demand, particularly for short term overflow space and fulfilment centres.

“COVID-19 is expected to lead to a significant structural and cultural shift in the way consumers buy their goods, many of whom have not shopped via online platforms before,” Mr Tyson said.

“Long term, these buying habits are expected to be permanent.”

While there is an expectation that capital values will fall, investors are expressing interest in acquisitions in the short to medium term. 

More than 43 per cent of investors intend to acquire their next industrial asset within the next six months while just 15 per cent intend to divest over the same period, according to the survey. This reinforces the expectation that the mismatch between supply and demand will remain.

This hawkish outlook is possibly driven by an expectation of bargains surfacing over the next year.

Given the current uncertainty, 89 per cent of investors expect the market to take 12 months or longer to stabilise. In the interim, 54 per cent of investors believe capital values will fall by up to 10 per cent and 64 per cent are expecting capitalisation rates to soften by up to 50 basis points.

Colliers International associate director Luke Crawford said the company’s forecasts flagged the share of online retail in Australia to more than double over the next few years. For the industrial and logistics market, this will result in heightened demand for larger distribution centres and smaller centres close to densely populated areas.

“The fundamentals for industrial and logistics property remain sound over the long term and as a result the sector is expected to be less impacted than others through this period,” Mr Crawford said.

The proportion of online retail sales in Australia remains relatively small at 6.6 per cent, compared to other global markets such as the US and UK where it is as high as 22 per cent.

“With the exception of population growth, which will take a hit in the short term as net overseas migration drops significantly off the back of border closures, the other key drivers of infrastructure investment and growth in e-commerce will continue to remain strong in the current environment,” Mr Crawford said. 

Jobs and warehouses

Australia Post has started recruiting 600 casual workers to help with its parcel delivery demand and has repurposed and reopened 15 processing centres. 

Myer recently brought back around 2,000 staff to assist with online orders, while there have also been cases of retailers using their existing stores as smaller fulfilment centres or ‘dark stores’, including Accent Group, which owns Athlete’s Foot, Platypus and Hype DC, and Kmart.

“While some volatility is expected within certain segments of the industrial market, our view is that the sector is expected to perform well in comparison to other sectors in the current economic environment and the structural, and likely permanent, shift towards online retail underpins this outlook,” Mr Tyson said.

The pandemic has undoubtedly put other pressures on the storage property market through disruptions to the supply chain but could eventually result in a boost for local manufacturers and, by extension, industrial property.

“We have seen some groups under pressure to keep up with demand given they source materials or goods from offshore markets,” Mr Tyson said.

“The recent events have exposed a level of fragility in some global supply chains but the COVID-19 outbreak also has the potential to reduce our reliance on global supply chains as more goods are made locally. 

“The early signs of this are starting to emerge in food and pharmaceutical manufacturing industries and will assist the logistics sector through increased domestic and offshore consumption.

“Consumer demand has shifted towards defensive and non-discretionary based occupiers, including food and beverage retailers, e-commerce groups and fast-moving consumer goods, transport and logistics providers, data centres and cold storage occupiers.”

National trends

In Western Australia, some tenants sought rent relief, however, a coordinated fiscal and monetary stimulus response to this crisis could have beneficial outcomes for the state’s resources sector and the investment outlook.

Hero Properties chief executive Julie Drago said the predominant mining services companies had mostly continued to service the resources sector as it operated throughout the lockdown, and warehouse demand remained unscathed.

“There appears to be increased demand for warehouse stock, given this is favoured by the logistics sector and the obvious increases we’ve seen emerge in online sales,” Ms Drago said.

“Workshop space is occupied by the manufacturing sector, which comprises most of our tenants, and they had no restrictions on trading, although a few of them have reported a drop in projected revenue and have applied for the Federal job keeper subsidy.  

“Unfortunately, the oil price is also having a huge impact on tenants within the oil and gas space, with forward orders being cancelled.  

“In the longer term, the COVID crisis has focused attention on the decline of goods being manufactured in Australia and it is hoped the government will do much more to support Australian manufacturing at a time when it is so crucial to the economy.”

Sydney and Melbourne remain the focus cities for industrial property investors, with almost 60 per cent saying they are very likely or likely to invest in these cities within the next 12 months.

Capital values for prime industrial properties are expected to be little changed over the next year in Brisbane, and are expected to contract less than one per cent in Perth and Melbourne.

 Mr Crawford of Colliers said the performance of the Sydney industrial and logistics market in the last six months has remained strong, however, there were some early signs emerging that showed hesitation towards the leasing and investment markets. 

“2020 started very strongly for the local market, with leasing and investment demand remaining significant and this theme was expected to continue over the year,” he said.

“COVID-19 has made the near-term outlook more uncertain but notwithstanding this, growth in e-commerce activity and infrastructure investment, coupled with heightened demand from non-discretionary occupiers, is supporting the logistics sector and demand for warehouses in strategic locations.”

In Melbourne, leasing take-up has been well above the long-term average and has stemmed largely from transport and logistics providers and retailers.

The Colliers report said Adelaide’s industrial property activity had been subdued.

The report said institutional capital was a key feature of the Adelaide industrial market, accounting for 72 per cent of total sales volumes during 2019, however this may fall in 2020 with a limited supply of institutional grade assets being offered. 

The second half of 2020 could see some institutional and private owners divesting non-core assets, the report said.