E-commerce businesses flock to suburban warehouses

Australia’s suburbs are set to see a boost from industrial investors as more e-commerce, logistics companies look to base themselves even closer to their customers

September 18, 2018

Australia’s suburbs are set to see a boost from industrial investors as more e-commerce and logistics companies look to base themselves even closer to their customers.

As online retailing booms, more and more retailers are looking at smaller industrial facilities near densely populated areas to better cater for demanding delivery windows.

Occupancy in industrial pockets across Sydney’s south-western and ‘inner’ sub-markets, as well as precincts in Melbourne’s inner and south-east sub-markets, have risen dramatically over the past 12 months.

Take up of space in the inner Sydney market specifically by e-commerce businesses has increased seven-fold between 2015 to 2017, according to JLL Research.

As a result, rents and underlying land values have “cranked up dramatically”, says Tony Iuliano, JLL’s Head of Capital Markets for Industrial and Logistics in Australia.

“Parramatta in particular is absolutely rocketing at the moment and that comes down to strong population growth and e-commerce companies needing to fulfill shorter delivery requirements,” he says.

“It’s a well-known fact that online retailers want to be close to road infrastructure and major arterial routes. But there’s no denying we are seeing a lot more demand in non-core locations and high density residential areas.”

As well as Parramatta, known as Sydney’s ‘second CBD’, areas in Sydney’s middle and outer ring locations, including Chullora, Wetherill Park and Erskine Park, which have traditionally been occupied by local businesses and state-based operations, are also in the frame for major e-commerce businesses.

Melbourne’s topography means demand is more widely spread, taking in the city fringe suburbs in addition to Tottenham and Brooklyn in the inner west, and Clayton and Mulgrave in the south east.

Investor appeal

While stock in these areas is mainly classed as secondary, demand has been further driven by a limited supply of industrial stock in Australia overall.

Currently online retail sales make up around four percent of all retail sales in Australia. By 2025 this share is projected to rise to 9.9 per cent, which equates to approximately A$38 billion.

Based on historical industrial supply ratios, JLL Research estimates that 1.57 million square metres in additional developments per year will be required over the next decade. If online retail sales continue to grow, that number could increase to 1.88 million square metres over the next decade.

“If this occurs, certain markets could face the challenges in delivering these levels of supply, particularly those with existing limitations in the supply of development land,” the report said.

More than A$17 billion of capital has failed to find a home in the Australian industrial property market.

“In the year to date there have been A$1.6 million worth of transactions, which is less than 50 percent of last year’s volumes. Warehouses are in thin supply,” Iuliano says.

Prime and secondary net face rents in Sydney’s South West have increased 0.3 percent year-on-year, and 6.8 percent respectively while Melbourne’s City Fringe, they have increased 56 percent and 30 percent respectively. The prime average yield for industrial property in Sydney is 5.7 percent, at the half-year point, and in Melbourne it is 6.2 percent.

The current level of demand in the industrial sector reflects a trend happening across Australia’s eastern seaboard, which is also where the largest population growth has occurred.

Click to read about a new spec industrial wave that is hitting Sydney’s West.