Why invest in industrial property?

Industrial property has emerged as the standout performer in commercial real estate over the last few years, earning its reputation as the “golden child” among investors. For those looking to venture into commercial property for the first time, industrial assets offer an accessible entry point with compelling fundamentals that continue to drive positive returns.

The industrial sector has consistently outperformed other commercial property types in recent years. This success is due to robust demand, limited land supply in key locations, and shifts in how businesses operate. The pandemic accelerated several trends already underway, particularly e-commerce adoption, which created unprecedented demand for logistics and warehousing space.

Vacancy rates across Australian industrial markets may have slightly increased from their recent historic low, however remain below three per cent nationwide. This tight occupancy environment resulted in strong rental growth over the last few years which has more recently slowed. One of the most attractive aspects of industrial property is its accessibility across various budget ranges. Investments can start from sub $1-million for smaller industrial strata units or storage spaces, scaling up to multi-million dollar logistics and data centre facilities. This flexibility allows investors to enter the market at their comfort level and potentially expand their portfolio over time.

For first-time commercial property investors transitioning from residential, industrial properties often represent a more manageable step into commercial real estate due to their relatively straightforward construction and lease structures.

The industrial sector encompasses a wide range of assets, each with unique characteristics:

* Industrial strata units: Smaller warehouse or factory units within a larger complex, typically offering affordability and flexibility.

* Self-storage facilities: Consumer-facing storage solutions with stable cash flows and minimal tenant management requirements.

* Warehouses and logistics centres: Versatile spaces suitable for storage, distribution, or light manufacturing, forming the backbone of the industrial market.

* Cold storage: Temperature-controlled facilities serving food, pharmaceutical, and healthcare industries, commanding premium rents.

* Food manufacturing facilities: Purpose-built properties with specialised fit-outs for food production and processing.

* Data centres: High-tech facilities housing computing and data storage infrastructure, representing one of the fastest-growing segments.

When evaluating industrial properties, several factors significantly impact their investment potential:

Location and access: Properties with proximity to major transportation routes, ports, airports, and population centres typically command premium values. The “last mile” locations, those closest to major population centres, have seen particularly strong appreciation as e-commerce drives demand for rapid delivery capabilities.

Building specifications: Modern industrial tenants have increasingly specific requirements including ceiling height (clearance), floor loading capacity, column spacing, and adequate hard stand areas for truck maneuvering and container storage. Many tenants also require some office component, typically 10-20 per cent of the total area.

Infrastructure: Quality power supply with sufficient capacity, robust telecommunications, and appropriate environmental considerations all impact a property’s functionality and compliance requirements.

Tenant quality: Long-term leases with financially stable tenants provide security and reduce vacancy risk. Investments leased to ASX-listed companies or multinational corporations typically command premium prices due to covenant strength and may have additional ESG requirements which need to be considered.

The surge in e-commerce fundamentally changed how businesses distribute goods, with companies now requiring approximately 30 per cent more warehouse space for online fulfillment compared to traditional retail distribution.

Owner-occupiers have emerged as significant market participants, often willing to pay premium prices to secure their business premises and hedge against future rent increases. This trend has helped compress capitalisation rates across the sector, particularly for smaller assets.

The supply side remains constrained in many markets due to limited appropriately zoned and serviced land, together with increasing development costs. This has resulted in newly constructed product setting new benchmarks in rents to meet these increased costs. The high replacement costs in the current market mean that even older, secondary industrial assets remain attractive to tenants and maintain their value, as the cost of constructing new facilities often exceeds the rental savings from occupying newer buildings. Furthermore, occupiers and developers seek assets further from city centres, increasing the value of well-located existing assets.

Industrial properties offer several advantages from an income perspective:

• Longer lease terms (typically 3-10 years) providing income security
• Net leases where tenants pay outgoings including council rates and insurance
• Lower capital expenditure requirements compared to other commercial property types
• Expected moderate rental growth driven by limited supply and strong demand

Why consider Industrial?

Even after significant growth, industrial property remains attractive due to continued structural undersupply, adaptation to emerging technologies creating demand for new specifications, relatively low maintenance requirements, and evolving supply chain strategies emphasising resilience and localisation.

For first-time commercial property investors, industrial assets offer a compelling combination of accessibility, resilience, and growth potential. Whether you’re looking to diversify from residential investments or build a commercial portfolio from scratch, industrial property deserves serious consideration as your entry point into commercial real estate.

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Vanessa Rader | Ray White Head of Research