Grim economy stalls industrial development

Industrial property developers are holding back supply, faced with a dwindling number of tenants to commit to major new projects, according to the latest research from Jones Lang LaSalle (JLL).

September quarter statistics released by JLL showed there was a reported 368,100 sqm of major take-up activity across Australia, well down on quarterly results from previous years as the ongoing economic crisis crushed business confidence.

The Sydney market reported 31,400 sqm of activity, the lowest quarterly figure in the last decade.

“We have been speaking to developers all year and they have been delaying new project start dates because they can’t find a tenant willing to commit to making a major move in this environment. As a result the supply pipeline has been shrinking,” JLL national industrial analyst Nick Crothers said.

“We initially thought this would be a record year for new industrial development and were worried about oversupply. It turns out supply is not the issue – demand is.”

He said among the key factors contributing to weaker demand were the prohibitive cost of finance and the reluctance of businesses to lift their capital expenditure to fund relocation.

“The economic slowdown is also causing the transport and storage, wholesale trade and retail trade sectors to reign in their industrial property requirements as they cautiously examine their trading prospects for 2009,” he said.

A total of 769,400 sqm of new industrial projects were completed in Australia during the quarter, with 55 per cent of this space absorbed on completion by pre-committing occupiers.

The majority of new supply was completed in Sydney (253,200 sqm), Melbourne (232,900 sqm) and Brisbane (170,700 sqm), while Perth continues to experience strong demand for new space with 89 per cent of the completed space absorbed on completion.

There has been very little rental growth in existing prime grade stock around the country during the quarter, while Adelaide’s inner west and south east Melbourne showed some notable growth of five per cent and 2.4 per cent.

JLL national head of industrial services Jeff Pond said developers needed rental rates to go up considerably as development at current rates was not always viable.

“The feasibility of development projects is currently very hard to stack up, due primarily to huge construction cost increases, especially if they are going to be on-sold by the developer,” Mr Pond said.

He said with tenants focusing on cutting their costs, Sydney and Brisbane land values continue to fall, with even the strong Perth market stalling.

“Falling land values will eventually help the development equation, but this will take time to wash through.

“On a positive note, the reduction in new projects coming to market will benefit existing landlords, many of whom are reporting good enquiry levels and positive rental outcomes.

“When existing vacancy tightens it will result in upward pressure on rents. This is likely to trigger a new wave of development to accommodate tenants looking to expand again once their trading positions are clearer,” Mr Pond said.


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