Industrial real estate is a relatively cheap, versatile building asset. According to the Australian Bureau of Statistics’ Functional Classification of Buildings publication, industrial real estate is “used for warehousing, primary production and the production and assembly activities of industrial or manufacturing processes.” Examples include storage and distribution warehouses, laboratories, transport depots and abattoirs.
Industrial Real Estate as an Asset
In the year to June, CoreLogic collected 19,835 commercial real estate transactions. Of these, 7,907, or 39.9%, were industrial. The total value of industrial sales over the year, based on preliminary transaction data, was $15.2 billion, with a median value of $649,000.
Areas with high industrial real estate turnover include Malaga WA with 81 sales, Campbellfield VIC (76 sales), and Dandenong South VIC (69 sales). The commonality of these suburbs is that they house significant industrial precincts, within the metropolitan regions of capital cities (albeit on the fringes of the metropolitan).
It is difficult to say whether the high frequency of warehouse acquisitions is for conversion or utilisation of the asset as it is. Examining CoreLogic construction data provides some added insight into the industrial craze.
What Does Industrial Building Look Like across Australia?
CoreLogic project data, indicates that as of the end of April, there are 9,077 projects under construction. Of these, 7% are industrial builds.
Figure 1 shows the types of industrial real estate currently under construction. By far the most common types of industrial builds currently underway, according to CoreLogic project data, are warehouses, to be used for the storage and distribution of goods.
Figure 2 shows the location of industrial projects currently underway across Australia.
The highest concentration of industrial developments are occurring across greater Melbourne – which has historically been the case. The GCCSA region contains 28.9% of the industrial builds across Australia (181 projects), 75% of which were warehouses or distribution centres.
Within Melbourne, the highest frequency location of industrial development was in Greater Dandenong, where 15 projects are estimated to be taking place. The well-established industrial area is endowed with proximity to arterial roads, the South Gippsland Highway, the Monash Freeway and Eastlink.
Why are we building industrial?
Industrial real estate may seem like a counter-intuitive asset type for investment in Australia, given the narrative of declining manufacturing. Manufacturing contributions to GDP have declined -3.8 percentage points since 2008.
Given the nature of industrial builds as hosting the storage and distribution of goods, rather than growth in manufacturing, it is quite possible that the rise of industrial real estate may be indicated by increased household consumption, particularly through online channels.
When comparing annual growth in household consumption to annual growth in starts of warehousing (Figure 3), there is indeed a moderately positive relationship between the two variables (0.53). The graph shows the distribution of growth in warehouse commencements over the past 20 years, and the corresponding household consumption growth in that period. It suggests strong increases in household consumption are moderately related to increases in warehouse commencements.
The correlation becomes stronger when lag is removed from the data (0.57).
Admittedly, the correlation may be due to other forces exerting some upwards pressure on household consumption, such as increased migration or exporting, which would also place demand on commercial real estate. However, gaining a more detailed view of the type of construction underway provides a better chance of identifying leading indicators in construction.
Household consumption experienced a relatively subdued period of growth following the end of the mining boom in 2012. However, some indicators suggest household consumption growth may strengthen, provided there are no major demand shocks to the Australian economy.
Full time employment growth was 3.1% in the year to April 2018, well above the historical average of 1.9%. Growth in the wage price index has also recovered from a historic low of 1.9% at the June 2017 quarter, to 2.1% at the March quarter. This could further support growth in retail trade, and the growth of East Melbourne as a distribution hub, despite the disruption to traditional brick and mortar outlets across Australia.