The scarcity of prime industrial land is putting pressure on the industrial property market to reinvent the asset class.
Office, retail and residential developments all shoot for the sky in an effort to maximise value. Now, with prime industrial land in short supply and inner-city sites commanding higher prices due to competition from other sectors, the pressure is on industrial developers to follow suit and seek to reinvent the asset class.
“Multi-level industrial sites are relatively commonplace in Asia, where industrial buildings in densely populated cities can reach up to 15 storeys high,” says Scott Campbell, Bayleys National Director Industrial and Logistics.
“Asia is leading the way forward in other ways too. The constraints on warehouse space has spurred development of technology-based solutions facilitating higher storage density.
“Automated systems have helped cut down space and time needed to store goods. Some systems in operation in Asia have cut space requirements by 30 percent and speeded up the processing of goods by up to 10 times, compared to traditional warehousing methods.
“The growth in e-commerce is driving much of the change in the sector, and inevitably industrial sites in New Zealand will need to be developed along similar lines in the future.”
The industrial sector saw record growth in 2017 and is ripe for further growth and innovation, says Mr Campbell.
“Business growth in and around well-located industrial precincts has peaked to levels not seen since before the Global Financial Crisis and the boom in e-commerce has been rocket-fuel for the logistics industry. Also driving demand for industrial property are successes in food production and niche manufacturing businesses.”
Traditional industrial precincts are experiencing unprecedented low vacancy rates and strong capital growth, he says.
“Competition for centrally located industrial properties that can tap into transport arterials to optimise efficiencies is growing, and owners in these established areas can expect to command strong prices if or when they decide to sell.”
The squeeze on existing industrial property stock has forced the sector to come up with creative solutions, such as developing new multi-storey stock in brownfield sites, or to look to emerging population nodes and areas targeted for significant infrastructure spending, Mr Campbell says.
“The demand for industrial property that can fulfil the needs of a ‘click and collect, same-day delivery’ culture is only going to increase.”
Most major centres have plans in place to spur industrial growth. Local councils seem keen to future-proof their economies.
In the Waikato, the Future Proof initiative has seen councils work together on how to manage demand for industrial land and plan for infrastructure, and construction has begun on the first stage of the 30ha inland port in Ruakura.
In Wellington, the Transmission Gully and Kapiti Expressway roading projects have increased demand for industrial property in areas that were previously seen as unconnected.
In Auckland, a proposal from Infrastructure New Zealand for a new satellite city around Paerata, north of Pukekohe, has been met with strong support. The land around Auckland Airport has fast become the country’s top industrial destination and is home to most, if not all, of the major players in the logistics sector.
Roading improvements have opened up large tracts of land in the area but demand still outstrips supply.
“The economic conditions are favourable for more activity in the market, and the lack of available space in key areas should also spur the development of more purpose-built facilities,” Mr Campbell says.
“Pressure is building to upgrade industrial areas to meet the changing needs of tomorrow’s industries. Businesses are pushing inwards; they want to stay in the orbit of a CBD or the communities they support.”
With a shortage of undeveloped industrial-zoned land for new-build industrial properties in most of New Zealand’s main centres, the challenge for the sector is optimising existing space in order to achieve operating efficiencies.
Global integrated property group Goodman has developed multiple multi-storey industrial properties across Asia. It is now one of the firms taking the lead on vertical warehousing in Australia and New Zealand.
In signalling its intentions, Goodman points to an evolving environment where urbanisation, consumerism and changes in technology are intensifying competition between residential, higher density industrial, e-commerce and data centre uses, driving rents and land prices in areas where supply is already constrained.
“Industrial buildings in New Zealand tend to be single level,” Mr Campbell says. “If there is a second level or mezzanine it is most often used for related office space. Multi-level industrial will become increasingly feasible for high-value industrial users who can afford rents that would be needed to support the additional cost of multi-level construction.”
However, multi-level industrial is more than simply considering secondary floors. It requires a complete overhaul of the traditional warehouse model, maximising storage and access to meet the needs of modern industry.
Analysts predict that new technologies will give rise to compact, multi-layered vertical warehousing in urban areas. These buildings would be run by robots, so space and daylight would not be a factor.
Mr Campbell says Wal-Mart stores and Amazon are already looking to use drones for e-commerce, while some warehouse operators are pondering how drones and other technologies may help with inventory control.
“While square metre rates in New Zealand are still some way off, as the sector becomes more technology based and consumer demand for products distributed in an increasingly shorter time-frame continues to rise, the cost gap will become smaller and smaller. This will accelerate the development of multi-storey industrial properties in New Zealand.”
Read more market insights from Workplace
Subscribe to receive the latest commercial news and insights from Bayleys Workplace