A recent market analysis from Colliers International shows industrial rents in Sydney’s central west have steadied out and incentives are starting to climb, as the market shifts towards a lessee’s market. 

For a while, industrial assets have been considered “hot property” by most buying groups which has seen residual demand increase steadily in the last 24 months, according to the research.

At a glance:

• The industrial market in Sydney’s central west is still strong yet showing signs of turning toward a tenant’s market.
• The average yield is currently sitting on 5.38 per cent and the gap between primary and secondary assets is starting to broaden. 
• The market has seen a spike in vacancy rates from 1.7 per cent to 2.2 per cent in the business parks space and incentives are also starting to rise. 

Kellie Tattersall, Director of Industrial at Colliers International said that warehouses had offered a better rate of return and security to investors whilst providing the sharpest growth rates on record compared to other asset classes over the last two years.

“These strong results also gave landlords the confidence to dictate favourable terms and saw demolition clauses become the new norm to maximises the sites development flexibility,” she said.

“However, we are starting to see a different picture and a shift which favours tenants.”

Recent signs of economic volatility are starting to affect business sentiment in certain industries and possibly contributed to a slowdown in the capital growth and stabilisation on rental values.

For example, Sydney’s central West industrial market has seen a spike in vacancy rates from 1.7 per cent to 2.2 per cent (from 0.5 per cent as at Q1 2019) in the business parks space.

Incentives are also starting to rise by up to 3 per cent from 10 per cent (as at Q1 2019).

Adding pressure to the central west industrial market is the circa 60,000 square metres of new warehouse currently being built and 70,000 square metres of warehouse space in planning. 

“Many believe the industrial real estate market has peaked and the tide has turned, however, there is still a lot of optimism and misplaced funds in the sector that should keep capital values steady,” Tattersall said.

“Having said that, I believe buyers will be forced to take higher risks and lower their yield expectations to secure an industrial asset.”

The latest Colliers International market analysis shows that this trend has started to appear, and yield expectations have dropped by 25 BIPS in the last quarter for properties less than 5,000 square metres. 

The average yield is currently sitting on 5.38 per cent and the gap between primary and secondary assets is starting to broaden, with the roll-on effect of the most recent cut in cash rate yet to filter into the market.

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