Sydney Industrial Snapshot - July 2016

Sentiment - Potential stronger market, remain cautious of secondary market
Valuation - Becoming more expensive
Industrial construction was at high levels in 2015, with around 950,000 sq m of new industrial property completed (primarily in the Western Region (51%), which is strongly supported with infrastructure nodes).
Growth in industrial land values generally increased over the past six months, with the expectation of further increased land values in the Western Region. Speculative development has returned to the Western region (around 300,000 sq. metres in 2016).
Industrial leasing and sales activity has improved, with a positive NSW state economy, and this trend is likely to continue throughout 2016. Leasing is dominated by the transport and logistics industries.
There are more tenants in the market seeking new premises given the current stronger economic conditions. Thus, there will be strong competition amongst developers and institutions to secure a pre-commitment from a limited pool of premium prospective tenants.
Rents are expected to remain stable over the next 6 months, with a ‘super rent’ applicable to technically enhanced or special purpose premises (high office component, labs, cool store etc.). Incentives are expected to rise to entice tenants to remain in their current premises, or relocate to new premises.
Market primarily driven by services and distribution sectors (Wholesale and Transport & Logistics), with a limited manufacturing base. Difficult to achieve CPI+ rental growth in secondary premises, as tenants upgrade to prime or new properties.
Prime net rentals range from $130 - $180 sq. metre for the Southern region, $100 - $120 sq. metre for the Western region and $135 - $210 sq. metre for the Noth Shore.
Primarily, demand revolves around a greater need for efficiency and consolidation with upgrade, expansion and consolidation acting as a catalyst.
Rental Incentives have increased due to higher vacancies in existing stock providing strong competition to secure tenants. Incentives for Prime grade industrial space average 10% - 20%, subject to the strength of the tenant and lease term. Strong competition for pre-commitments has resulted in some innovative leasing packages, particularly with regard to Economically Sustainable Developments.
The continued low interest rate environment is likely to remain for the foreseeable future. This is beneficial for tenants, together with owner-occupiers and the investment market.
Prime rental rates are likely to remain static in 2016, given the high pre-commitment levels of new supply and relatively high vacancy rates. Rental growth over the past decade is due mostly to the erosion of development margins. Secondary grade rents will continue to remain under pressure, due to high vacancy rates and the ongoing trend for tenants to upgrade to higher quality properties to improve efficiency.
Industrial sales are expected to remain strong in 2016 (very solid sales in 2015). Yields in the prime market average 6.25% - 7.50%, whilst secondary yields are 8.00% - 9.25%. Properties with weighted average lease expiries (in excess of 10 years) are experiencing strong investor demand and will typically acheive a lower yield.