Property focus

ALL ROADS LEAD WEST

Colliers International works with industrial property clients to maximise the potential of property and accelerate their success. This month, we focus on the Melbourne West industrial market and the current industrial environment with Hugh Gilbert, Director at Colliers International.

Melbourne’s West is now front of mind for so many occupiers that are making supply chain decisions.

It should be no secret to most that the Melbourne West industrial market has in recent times been (by far) the most active industrial market in Australia. In fact, in 2019, the Melbourne West institutional market was responsible for 80 per cent of the development between Victoria’s two key industrial markets (West & SouthEast). Not only that, the Melbourne West market became Victoria’s biggest in 2019 after overtaking the South-East that calendar year. Clocking in at the end of the calendar year at 8,015,323Sqm the Melbourne West industrial market counts over 55 per cent of its ownership as controlled by institutional owners such as Charter Hall, Blackstone, Frasers amongst others.

SO, WHAT IS DRIVING ALL THE ACTIVITY?

Quite simply – occupiers – businesses like yours that lease industrial real estate.

In 2019, there was just under 1,000,000 Sqm taken up by occupiers

in Melbourne’s West with just under 400,000 Sqm (675m) of that activity being via pre-commitment development of purpose-built facilities.

SO WHAT IS DRIVING BRANDS LIKE UNIQLO, SUPER AMART & ROCKET LOGISTICS TO MELBOURNE’S WEST?

While there are various factors favouring the West Melbourne market, one overarching factor for the wider industrial market is of course changes in consumer behaviour with large occupiers reconsidering their supply chains and their footprints. Traditional bricks and mortar retailers are either leading with innovation or having their hands forced into the online arena. The resulting impact is creating a surge in demand for warehousing to store product reserved for online orders.

So understanding the structural shifts in the industrial sector are driven by changes in buying behaviour (Online retail grew at 23.5 per cent 2019/20), what are the other factors that are putting the West as front of mind for so many occupiers that are making supply chain decisions, and why are so many occupiers making the move to Melbourne’s West (In 2019, 35 per cent of occupier activity was driven by occupiers migrating from other state and interstate markets)?

Well there are various factors!

Displacement in other markets – The old saying is ‘they’re not making any more land’ and as the wider industrial market has begun it’s boom under the structural shift of E-commerce and all of the desired and promised delivery times that come with it, many markets have been restricted in being able to satisfy requirements or at least satisfy them economically. This was evident with Isuzu’s Head Office migration to the West Melbourne market from Port Melbourne after Colliers International brokered the deal. While Port Melbourne was a long-term home to Isuzu, it was no longer viable due to cost and lack of choice. In terms of land supply Melbourne’s South-East has circa 200

Hugh Gilbert is Director at Colliers International.

Ha’s of zoned industrial land at present while Melbourne’s West has close to 1,000 Ha’s but of course, it’s not only the sheer amount of available land that Melbourne’s West has to offer but the ownership profile of that very land. As any occupier that has completed a large scale leasing transaction with an institut ional landlord will know, they are accustomed to heavily incentivising occupiers to transact with them (in comparison to their private landlord counterparts) and in the West a whopping 71 per cent of land is controlled by institutions with the majority (what is available to build on today) of it being offered for pre-leases. In other words, the institutions are open for business and competition is rife! In 2019, Colliers International brokered a 29,000 Sqm pre-commitment for Electrical Wholesaler ‘Arlec’. Despite the facility being one and a half times the MCG football oval, Colliers International were able to present ten options put forward by credentialed developers. In other markets, there may not have been the same depth of choice

Being a land-rich market has long meant there is little pressure on supply which in turn, has (for the moment) kept rents comparatively lower than other key industrial markets (South-East 15-20 per cent - North 10-15 per cent). In 2019, institutional developers created an additional 145,000 Sq. of supply. While these buildings were all committed (such as Secon’s 33,310 Sqm commitment to Dexus) unconditionally in the calendar year which speaks to underlying demand, institutions continue to demonstrate a willingness and ability to create more supply. In 2020, there is an additional 125,000 Sq. slated to be constructed via institutional landlords. This comes after small early commitments in 2020 with GPT committing Godfrey Hirst Carpets (14,402Sqm) and Pet Stock (12,088Sqm) and Logos committing EFM Logistics Services Group (23,222Sqm) to their site in Altona.

While headline rents in the West are favourable, it’s the effective rents via larger incentives that tend to most compel occupiers towards Melbourne’s West as opposed to other state and interstate markets. While headline rents in the South-East and North are 15-20 per cent and 10-15 per cent higher respectively, effective rents (after incentives) would see rents closer to 20-30 per cent and 15-25 per cent higher in those markets. The main factor driving incentives in our view is institutional ownership. Due to the ability to create product via development, being able to gain scale through large warehouses and the long-term outlook for the Melbourne West market, institutions are extremely prevalent. Over 55 per cent of The Melbourne West (4,000 Sq.+ market) is controlled by institutions as opposed to 29 per cent in the S outh East and 26 per cent in the North. While institutions are typically a great driving force for headline rental growth, they tend to be more aggressive than private landlords in acquiring occupiers.

While effective rents are compelling, occupancy costs alone will never be compelling enough to justify any major industrial market as occupancy costs tend to come far behind transport costs, so there are factors that are driving the exceptional growth an elevated activity of this market that reach far beyond effective rents.

The market is exceptionally well located with Truganina (Truganina is the West’s most active market – 81 per cent of speculative development occurred here in 2019) only 28km’s from the CBD, 26km’s to the Port of Melbourne and only 25km’s to Melbourne Airport, not to mention Connectivity without the incursion of tolls that can service the Eastern Seaboard via the Western Ring Road and Hume Highway. Not only is the Western market well positioned in terms of major landmarks, it’s also surrounded by some of Australia’s fastest growing council areas and populations being The City of Wyndham and The City of Melton. The future for the welllocated West looks brighter again with Victoria’s flagship infrastructure project, The Westgate Tunnel Project set to move the market even closer to the Port. The $6.7 Billion project is being estimated to reduce travel time from the core market to the Port by up to 50 per cent.

A long with low occupancy costs and an optimum logistics location, there is of course another factor driving demand for Melbourne’s West and it’s the growth of the eco-system – it is becoming self-fulfilling as major occupiers relocate to Melbourne’s West, it is creating a need for those that support them (Transport & Logistics) to relocate to the core markets themselves. This was evident when Colliers International relocated Victorian Freight Services (VFS) from the premium industrial market of Altona to Truganina under a 7,750 Sqm pre-commitment with Charter Hall. VFS noted that relocating to be closer to their customers was a key driver.

SO WILL IT ALL CONTINUE? We certainly think so.

The location attributes of the Port, CBD, Victoria’s growing population and links to interstate may have been overlooked in the past but with transport and logistics traffic increasing exponentially to meet changes in buying behaviour, these landmarks are more important than ever. The West is now well and truly on the radar for all major occupiers. Not only is Melbourne West Victoria’s biggest industrial market but it’s also the most accommodative and in the best position to capture future requirements with still considerable land supply in comparison to other key markets. While we fully expect that with so much activity will come severely diminished supply over time and with that, rental growth, the ecosystem in our view is becoming too large to deny and that will offset the market becoming less desirable due to increased occupancy costs.

To learn more about how we can assist your real estate decisions, and for more information on West Melbourne’s industrial precinct, contact Hugh Gilbert on 0409 730 858.