In this second article of our RESET series, we look at the many opportunities that are available for Industrial tenants looking to reset their property strategy. 

“We’re in a landlord's market at the moment, which is challenging for industrial tenants. The good news is that there are still strategies we can employ to get a good result for tenants.”
Michael Raymond: Director, Industrial and Adelaide

Strong growth + high demand = a landlord’s market

The strength of the industrial property sector has been well documented over the past 12 to 18 months.

This has seen investment and funds flow into the sector as a preference over other sectors.  Of course, it is well known that growth in the sector has been underpinned by the surge in online purchasing and e-commerce, together with companies wanting to shore up their supply chains.

It is also apparent that the growth in e-commerce in Australia is lagging behind the rest of the world; so, it is perhaps a logical expectation that the industrial sector will continue to perform well as an investment as we play catchup.

This is of course tremendous news for investors and owners of industrial real estate – the market has experienced double digit growth in capital values over the past 5 years. 

But where does this leave the industrial tenant? 

It is without doubt a landlord’s market and the tenant is faced with a number of challenges.  Very low levels of available stock, increasing rents, incentives for new tenants drying up, demand outstripping supply - all of which swings the pendulum in favour of the landlord.

However, there are a number of potential strategies that can be adopted which may result in a more favourable outcome for a tenant.  This will depend, to an extent, on where the tenant is in the lease cycle, ie new lease, just commenced, mid-term, approaching renewal with further options, or approaching lease expiry with no options.  But the strategies may involve:

Introduce competition  

Making it known to the market (and landlords) that you are considering several options is a good way to induce them to engage and to provide a competitive proposal.  Even in tight markets, our experience is that competitive tension promotes creative options that improve tenant outcomes.   

Be flexible 

Consider options that you may not have otherwise considered.  Are you able to go a few suburbs further out?  Is it necessary to have prime grade space or will secondary space satisfy your requirement?  Generally speaking, industrial stock in outlying areas and secondary stock are more plentiful and also more affordable. 

Employ technology or modernise processes

This is particularly relevant to the larger tenant, who is exposed to a significant rental bill due to the amount of area occupied.  Modern systems and technology have made significant improvements in space utilisation and productivity.

Artificial Intelligence (AI) and robotics are becoming the norm rather than the exception.  Modern racking systems and loading and retrieval systems allow for greater storage heights, which have led to higher warehouse clearance and reduced footprints (thereby reducing rental costs).  While the capital outlay can be significant, the annual operational savings can lead to a short payback time frame.

Think Regional

Infrastructure spending is at an all-time high providing greater connectivity and reduced travel times between centres. As a result, new industrial land is being released in strategic locations in regional areas, providing well serviced, affordable industrial land. As an example, the new airport at Badgerys Creek in NSW has already seen a migration of business further out of Sydney.  

Use experts  

The industrial real estate market is predominantly controlled by the supply side (landlords, developers, and leasing agents) which is concentrated, well-organised and powerful. In contrast, the demand side, or the tenant is fragmented and under-represented, with far less influence on tenancy arrangements.  As a result, tenants find it difficult to access reliable information, and real estate decisions can be ill-informed and ill-advised.  To mitigate this risk, we recommend that industrial tenants call on experienced advisors such as LPC who only represent tenants and are well placed to improve occupier outcomes in a tight market.

As a practice, we recommend annual reviews of your industrial property strategy, and this time of the year is opportune for resetting your goals. Says Michael Raymond, “With the demand for industrial real estate looking to outstrip supply for the foreseeable future, it’s critical to get a competitive edge. The opportunities are still out there”. 
 

Why LPC?

At LPC, we partner with tenants and occupiers across Australia and New Zealand to optimise their office, industrial and retail property portfolios providing an integrated suite of services including transaction management, portfolio and lease management and project management.  We provide conflict-free advice and representation, meaning we have no ties with owner-developers or landlords. Tenants and occupiers interests remain at the core of what we do as we negotiate on your behalf and endeavour to rebalance the scales in a market which favours landlords.

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