Logistics & Industrial Occupier Market Outlook 2024

AUSTRALIAN SERIES Q3 2024

LOGISTICS & INDUSTRIAL Occupier Market 2024 Outlook

Introduction

Key Outlook Summary

Welcome to Cushman & Wakefield’s Australian Logistics & Industrial (L&I) Occupier Market Outlook report. This report unpacks our view on the direction of the occupier market, including demand, vacancy and rents, as well as the trends that influence demand going forward.

01 Warehouse gross take-up is expected to total 3.0-3.2 million sqm in 2024, before picking up to 3.5-3.7 million sqm in 2025.

02 Demand over the next 12 months will be underpinned by everyday consumption and sector structural trends including e-commerce, while leasing demand from businesses tied to cyclical spending is expected to pick up in 2025, in line with increased levels of consumer consumption.

Following three years of unprecedented growth, demand for warehouse space has returned to normalised levels over the past six months, reflecting broader economic conditions, rising debt costs, and stickier-than-expected inflation. Notably, this has resulted in some occupiers taking a more cautious approach in committing to new space, worsened by uncertainty surrounding inventory management levels. Notwithstanding this, demand remains well above pre-pandemic benchmarks, and stems from a broader pool of occupiers.

Demand drivers such as increased e-commerce adoption, a focus on supply chain optimisation and resiliency, population growth, and the continued investment in transport infrastructure will continue to support leasing demand, while the pick-up in economic growth in 2025 will underpin demand from more discretionary warehouse occupiers.

03 Despite the increase in speculative supply, high pre-commitment levels means vacancy rates in all cities will remain under the market equilibrium of 5.0% over the next 12-months.

04 Rental growth is forecast to continue to outpace historical benchmarks, with growth of approximately 6.0% forecast for 2024 and 5.0% for 2025. Land-constrained markets where supply is more limited are forecast to see growth rates in excess of this. 05 Notwithstanding a 70% jump in rents since 2020, occupiers are increasingly using real estate as a lever to help control other costs. This will continue to drive demand for well-located facilities where transport cost savings can be achieved. In most cases, occupiers are willing to pay a higher rent if it facilitates cost savings in other areas of the supply chain such as outbound logistics costs. 06 Over the next few years, increased automation and technology adoption will support leasing demand in greenfield markets and those with pre-commitment availability. This will be driven by the bespoke needs of the end user as automation is more challenging to implement in existing facilities.

Lead Authors

Luke Crawford Head of Logistics & Industrial Research – AUS Luke.Crawford@cushwake.com +61 421 985 784

David Hall National Director Head of Brokerage

Logistics & Industrial – ANZ David.J.Hall@cushwake.com +61 428 242 410

Contents

Impacts of Increasing Supply

03 State of Play & Outlook

17

06 Current Occupier Insights

21

Where to for Rents?

Can Tenants Continue to Keep Paying Higher Rents?

07 Headwinds Impacting Demand

24

09 Occupier Demand - Where is it Heading?

30 Automation & Technology - Options & Impacts

33 Modern Warehouse Design Trends

Sectors Driving Warehouse Demand

11

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OCCUPIER MARKET 2024 OUTLOOK | 2

State of Play & Outlook

The below highlights the current occupier market indicators across each capital city and their 12-month outlook.

BRISBANE

CURRENT OUTLOOK

Vacancy Rate YTD Take-up 2024 Supply Pipeline Rental Range

2.8%

249,655

646,519

$157-$176

Outgoings Range

$30-$35

BRISBANE

PERTH CURRENT OUTLOOK

SYDNEY CURRENT OUTLOOK

Vacancy Rate YTD Take-up 2024 Supply Pipeline Rental Range

Vacancy Rate YTD Take-up 2024 Supply Pipeline Rental Range

2.8%

1.9%

77,985

468,774

ADELAIDE

PERTH

110,871

1,029,663

$143-$162

$233-$273

SYDNEY

Outgoings Range

Outgoings Range

$28-$32

$54-$73

MELBOURNE

ADELAIDE

CURRENT OUTLOOK

Vacancy Rate YTD Take-up 2024 Supply Pipeline Rental Range

1.6%

MELBOURNE

22,203

CURRENT OUTLOOK

77,468

Vacancy Rate YTD Take-up 2024 Supply Pipeline Rental Range

1.6%

$131-$153

396,082

Outgoings Range

$20-$30

916,966

$138-$157

All figures are as of Q2 2024. Take-up and supply figures are in sqm. Rental ranges and outgoings are a blended city average and are on a per sqm basis. Outlooks are based on a 12-month forecast.

Outgoings Range

$25-$33

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Current Occupier Insights

Inventory Management For most occupiers, inventory management remains the number one concern . Inventory levels are still volatile for wholesalers and transport and logistics occupiers as their customers are uncertain of the stock levels and space requirements required over the next 12-24 months. A slowing retail trade environment and continued supply chain volatility underpins this uncertainty . As a result, occupiers are reluctant to give up space, even if it is surplus to their current needs, as they know demand can turn quickly . For this reason, lease renewal rates are anticipated to remain high until businesses have greater visibility on required stock levels over the short to medium term. Rents The pace of growth and current level of rents are becoming a concern for some occupiers; however, it varies by sector and city. Given most leases currently in place were struck three or more years ago, with capped market reviews at options, there has been a significant lag in rental growth for existing facilities . Many occupiers are unaware of the unprecedented growth recorded over the past three years. The impacts of higher rents are most pronounced for lower throughput occupiers who tend to have lower inbound and outbound logistics costs. However, rents in most cases still represent less than 10% of total supply chain costs .

Locational Shift Partly a reflection of cost, occupiers that can service Sydney from interstate or regional locations are actively looking to do so due to the lack of availability and uncertainty in delivery timeframes for new builds . However, this is not a trend we anticipate at scale, but rather select cases based on business need. Markets that are benefiting from this are Melbourne’s North and Brisbane. The business case for Melbourne’s North stems from the ability to service the Sydney market via a single truck driver shift. Alternatively, Brisbane is seeing examples of tenant migration from Sydney given the reduction in backload costs on the southern return leg.

Rent vs Own Select well-capitalised occupiers that have traditionally been tenants are starting to consider acquiring assets or land in order to control their long-term cost base and gain a competitive advantage. While this is not a trend we anticipate will become widespread, it highlights the shift in mindset from several major occupiers, particularly transport and logistics operators.

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Slowing Consumer Consumption The largest impact on warehouse demand over the next 12 months will stem from weaker demand for goods and services as households continue to reign in their budget, given the current cost of living pressures. However, partly offsetting this is population growth, which is currently at its highest level on record and will continue to stimulate warehouse demand in each market. The impacts of slowing consumer consumption will be most pronounced for discretionary based retailers. Supply Chain Volatility Beyond local demand and supply dynamics, broader geopolitical issues will continue to impact occupier leasing strategies . At their core, the issues witnessed over the past 12 months, including the events in Europe and the Middle East, have placed a greater emphasis on supply chain resiliency. Continued supply chain challenges will support further demand as retailers and other occupiers continue to hold “buffer” stock. Our experience during the pandemic showed that occupiers were holding anywhere from 10%-25% more stock than pre-pandemic, which was used as a buffer. While the top end of this range is unlikely, given that businesses are cost-conscious in the current

environment, it is expected that 5%-15% more stock will be held than pre-pandemic levels, however, this will vary from occupier to occupier. As a result of these challenges, occupiers are exploring a hybrid model of inventory management, including a mix of ‘just in case’ and ‘just in time’ strategies, ensuring the supply of high-flow goods should occupiers wish to meet customer demands and stay competitive. Beyond geopolitical risks, several other issues could potentially impact demand, including climate risk . This was most recently evidenced by the current drought conditions being recorded at the Panama Canal, where shipping capacity had been reduced by almost 50%, and underscores the potential impact of issues beyond the control of occupiers. Slowing Demand From China A downside risk to the Australian economy, and therefore, warehouse demand, is the outlook for economic growth in China . Since the GFC, China has been the main recipient of Australia’s exports, receiving approximately one-third of total export volumes. With several forecasters anticipating GDP growth in China to fall below 5.0% in 2024 and 2025, this will negatively impact Australia's export demand.

Headwinds Impacting Demand

High Interest Rates & Inflation Inflation remains stubbornly high and above the Reserve Bank of Australia’s (RBA) target band of 2%-3%. The knock-on effect of inflation is reduced spending power from consumers. This is playing out as there has been a pull back of discretionary spending as consumers direct their spending to essential and non-discretionary retail items like food and housing costs. Higher inflation levels have impacted occupier balance sheets as costs of producing goods and providing services to their customers have increased . The largest impacts have stemmed from higher transport, insurance and energy costs , which collectively make up a significant

share of total operating costs. At the same time, occupiers have been impacted by rising rents and statutory outgoing costs, given the growth in land values, which has further compounded the impacts. To offset cost pressures, occupiers are continuing to invest in automation and technology and targeting locations that reduce transport costs . These factors will continue to support gross take up volumes. The impact of higher interest rates on occupiers is most pronounced for those seeking financing to facilitate business expansion.

Figure 1. Australia Inflation & Cash Rate Outlook

-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%

Figure 2. World Container Index ($US per 40-ft container)

$4,500

$4,000

$3,500

$3,000

$2,500

$2,000

$1,500

Pre-pandemic average = $1,420

$1,000

Inflation (YoY Change)

Cash Rate

Source: ABS, RBA, Oxford Economics, Cushman & Wakefield

$500

World Container Index

Source: Drewry, Cushman & Wakefield

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Occupier Demand - Where is it Heading?

Figure 4. National L&I Gross Leasing Volumes Forecast (sqm millions)

5.0

Forecast

4.0

3.0

it remains well above the pre-COVID average (2010-2019) of just under 2.3 million sqm per annum. From 2025, gross warehouse take-up is expected to pick up further to approximately 3.5-3.7 million sqm , led by: • An improvement in land availability in select markets, including Sydney. • A pick-up in economic growth which will provide support to business expansion plans. • The lag impacts from the current record level of population growth. Gross take-up also mirrors the speculative development pipeline as occupiers gravitate towards newer buildings and focus on efficiencies. Speculative supply for of 2024 is set to total approximately 1.7 million sqm, which will boost take-up once these facilities are leased. However, some of this movement will trigger backfill leasing options, which will mute net absorption figures.

After an unprecedented period of demand, gross warehouse take-up has slowed in 2024, with approximately 1.2 million sqm leased so far in the year (to Q2 2024), which is well below the levels recorded at the same point over the past three years. The slowdown in take-up has stemmed from two factors: • Low vacancy levels limiting the expansion plans of some occupiers. • The current economic environment as occupiers take a more cautious approach to their long-term real estate strategy. Further, the rapid growth in rents has meant that occupiers are reluctant to commit to a larger facility without having greater clarity on their inventory management needs, which is proving challenging given patchy levels of consumer consumption and continued supply chain disruption. Our modelling shows that warehouse demand (gross take-up) of approximately 3.0-3.2 million sqm is expected for 2024 . While this level of take up is below the levels recorded in recent years,

2.0

1.0

0.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

2010-2023 Annual Average

Source: Cushman & Wakefield

Figure 3. Impacts of Population Growth and E-commerce on Warehouse Demand

Source: ABS, NAB, Oxford Economics, Cushman & Wakefield

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OCCUPIER MARKET 2024 OUTLOOK | 10

Sectors Driving Warehouse Demand

What's the outlook for these categories? Essential Spending Essential Spending is anticipated to grow at a steady pace, underpinned by population and wage growth. Every new resident creates additional demand for everyday essential items, including food and other fast-moving consumer goods (FMCG), including toiletries and household products. While the impacts of population growth are not felt immediately, the flow on to warehouse demand will occur when occupiers continue to expand and outgrow their current facility. Over the next two years, we anticipate occupiers in this category will account for 25%-35% of leasing demand, equating to space requirements in the order of 850,000–1,200,000 sqm per annum . Transport and logistics contracts tied to supermarkets and FMCG retailers are anticipated to account for the bulk of this demand, some of which will include cold storage warehouse space.

The take-up of warehouse space in recent years has been dominated by the transport and logistics, retail trade and manufacturing sectors, collectively representing 83% of leasing demand since the beginning of 2020. However, at its core, demand for warehouse space is imbedded in consumer needs .

To understand this and to unpack the outlook for demand, we have broken down warehouse demand into the following three categories: essential spending, cyclical spending and structural trends. Overlapping with each of the three main categories is the transport and logistics sector, which touches on each category at some point in the supply chain.

Figure 5. 2024-2025 Demand Outlook by Industry Sector

&

T

L

R

O

O

G

P

I

S

S

T

N

I

A

C

HOUSEHOLD

CONSTRUCTION

R

S

GOODS

T

Figure 6. Australian Retail Sales Historical Trends

DISCRETIONARY APPAREL

Category

3 months

12 months

25 years (p.a.)

HEALTH &

Supermarkets

2.1%

4.0%

5.1%

ELECTRONICS

Liquor

-0.6%

0.7%

7.5%

PHARMACEUTICAL

Other specialised food

5.5%

1.5%

2.9%

L N

A

G

C

AUTOMOTIVE

I

I

L E

D

Pharmacy & cosmetics

6.7%

7.4%

6.8%

C P

N

Y

C

Household goods

-3.4%

-4.6%

4.7%

L

S

A

MANUFACTURING

S

R

D

Electronics

-3.8%

-4.6%

4.1%

U

R E N

U C T

ESSENTIAL CLOTHING

Hardware & gardening

0.9%

0.0%

6.0%

E

T

S

R

S

S

T

P

E

Clothing

0.1%

1.0%

5.1%

S

E

N

N

T

I

D

A

Footwear & accessories

0.3%

-0.5%

4.3%

L

I

N

G

Department stores & DDS

-0.2%

1.1%

2.5%

FOOD & BEVERAGE

E-COMMERCE

Recreational goods

0.6%

-3.2%

3.5%

Takeaway food

3.3%

5.6%

5.3%

Cafes & restaurants

1.6%

5.4%

6.9%

FMCG

T

R

Total retail

1.4%

2.0%

5.0%

S

A

C

I

N

Online food retailing

15.3%

12.0%

24.0%

T

S

S

I

P

PACKAGING

G

O

Online non-food retailing

2.2%

1.1%

21.0%

O

R

L

T

&

Online total

6.1%

4.2%

21.8%

Source: Cushman & Wakefield

Source: ABS (April 2024), Cushman & Wakefield

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OCCUPIER MARKET 2024 OUTLOOK | 12

Structural Trends Structural tailwinds have had a significant bearing on warehouse demand in recent years. Most notably, this has included the greater adoption of e-commerce, which has created a significant boost to occupier demand. While e-commerce could be tied to everyday consumption and cyclical spending, it is a structural thematic given the impacts that it has had and will continue to have on demand.

Despite the e-commerce penetration rate increasing from 9.0% pre-pandemic to its current 13.4%, there remains significant scope for further growth in the Australian market, supported by how underpenetrated the Australian market remains in comparison to other global markets. Millennials have underpinned the take-up of e-commerce in Australia, and with this cohort entering their peak spending years, our view is that the penetration rate will rise to 16.5% by the end of 2027.

Cyclical Spending Demand from businesses tied to cyclical spending is forecast to moderate, particularly over the balance of 2024, as consumers remain cost-conscious. More discretionary-based retailers, including those specialising in household goods, are expected to be less active in the leasing market. Recent retail trade data supports this with retail expenditure for household goods contracting by 4.6% over the past 12 months (based on annual turnover). On the flip side, demand from the construction and automotive sectors is set to increase over the next two years, supported by an emphasis on housing supply from the Federal Government and continued demand for vehicle sales as well as vehicle spare parts and maintenance. The impact of new housing supply will be two-fold as the raw materials and equipment to build these dwellings will flow through a warehouse at some stage, while once the dwellings are complete, it will drive demand for bulky goods, including appliances and furniture.

Over the next two years, approximately 15%-30% of leasing demand is expected to stem from this category, equating to space requirements in the order of 500,000–1,000,000 sqm per annum . A greater weighting is anticipated in 2025 as economic growth improves, thereby supporting increased levels of discretionary spending.

Figure 7. Active Occupier Briefs by Sector

6%

8%

Figure 9. Global E-Commerce Market

8%

46%

Early Phase

Maturing Phase

Advanced Phase

12%

China

50%

19%

40%

South Korea

Brazil

Transport & Logistics

Retail Trade

30%

Manufacturing

Wholesale

United Kingdom

Mexico

Food & Beverage

Other

20%

Australia

USA

Source: Cushman & Wakefield

10% Current Penetration Rate

Japan

Figure 8. National Dwelling Completions

Canada

260,000

Early Phase Overview

Maturing Phase Overview

Advanced Phase Overview

Fed Govt. Annual Housing Target

240,000

• Widespread adoption - E-commerce growth rate slowing • Infill market focus • Large international brand presence • Focus on technology – blurring the lines between online and physical buying • Increased use of same day/ next day delivery

• Sustained e-commerce growth rate • Enlarging e-fulfilment network • Increase in international brand

• E-commerce growth rate accelerating • Embracing e-fulfilment • Limited international brand presence • Online orders are largely fulfilled through existing retail or shared facilities

220,000

200,000

presence and expansion of online capabilities from national retailers

180,000

• Increased demand for

160,000

dedicated fulfilment facilities

• Increasing infill market presence

140,000

120,000

100,000

Source: Statista, Cushman & Wakefield

Source: ABS, Cushman & Wakefield

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OCCUPIER MARKET 2024 OUTLOOK | 14

Manufacturing is also included as part of the structural trends category, given the government stimulus that has or is planned to flow into the sector. Most notably, this included the Future Made initiative as part of the 2024 Federal Budget, and the 2021 announcement of the $1.5 billion Modern Manufacturing Strategy. Our enquiry data shows that manufacturers represent 12% of current enquiries in the market. Lastly, given Australia’s ageing population and demand for pharmaceutical and medical supplies, healthcare is an emerging structural trend that will support warehouse demand. While their share of take-up has only been 2.8% since the beginning of

2023, this is up from less than 1.0% pre-pandemic, and is anticipated to grow at a steady pace. Given the need for some of these goods to be stored at set temperatures, this will provide support for cold storage space. Over the next two years, we anticipate that these structural tailwinds will account for approximately 35%-60% of gross take-up, equating to space requirements in the order of 1.2–2.0 million sqm per annum. A large share of this will stem from transport and logistics operators.

Figure 10. Manufacturing & Health/Pharmaceutical Gross Warehouse Take-Up (sqm)

0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000

2013 2014 2015 2016 2017 2018 2019 2020 2021

2022 2023

Manufacturing Health / Pharmaceutical

Source: Cushman & Wakefield

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Is it equal at a city and submarket level? For 2024, supply is forecast to be evenly split between the Sydney and Melbourne markets at approximately 1.0 million sqm respectively, while Brisbane and Perth will record supply completions above historical benchmarks. Alternatively, supply in Adelaide is subdued and reflects it being more of a pre-commitment market. At a submarket level, Melbourne's West and Sydney's Outer West are anticipated to account for over a third of the national supply pipeline in 2024 and 2025. Elsewhere, supply over the next two years will also be strong in Melbourne's North (735,000 sqm), Brisbane's South (590,000 sqm), Sydney's South West (560,000 sqm).

Impacts of Increasing Supply

Figure 12. 2024-2025 Share of Supply by Capital City

4%

4%

33%

21%

In response to an unprecedented run of elevated occupier demand, developers have responded with a strong level of supply forecast in 2024 and 2025. At this stage, we are tracking approximately 2.8 million sqm of supply in 2024, followed by a further 3.8 million sqm in 2025. However, the timing of some projects remains uncertain given continued planning and servicing

delays, while some projects are likely to only proceed once a pre-committment has been secured. The big shift in supply has been the increased delivery of speculative supply, with just over 1.7 million sqm in the pipeline for 2024, while for 2025, we are tracking a similar volume.

38%

Figure 11. Australian L&I Supply (sqm) - Speculative v Design & Construct (D&C)

Sydney Adelaide

Melbourne

Brisbane

Perth

Forecast

4,000,000

Source: Cushman & Wakefield

3,500,000

3,000,000

Figure 13. 2024-2025 Submarket Supply (sqm)

2,500,000

1,400,000

2,000,000

1,500,000

1,200,000

1,000,000

1,000,000

500,000

800,000

0

600,000

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

400,000

Speculative D&C

200,000

Source: Cushman & Wakefield

0

East

East

West

West

West

West

North

North

North

North

South

South

South

South East

Inner North

M1 Corridor

North West

Outer West

South West

Outer North

Trade Coast

Central West

Sydney

Melbourne

Brisbane

Perth

Adelaide

Source: Cushman & Wakefield

Includes pre-committed and speculative supply

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Vacancy Rate Impacts Ordinarily, supply of this magnitude would trigger a material rise in vacancy rates, similar to what is occurring in the US and across Europe. However, almost 60% of the 2024 pipeline is already committed meaning only modest impacts from new supply on vacancy rates. While not all of these commitments are tenant expansions, which will trigger secondary backfill leasing space, current enquiry on the East Coast is in the order of 2.0 million sqm. Structural tailwinds and significant planning delays in select cities will act as a ceiling on how high vacancy rates can go. Our base case scenario is for the national L&I vacancy rate to move to 2.9% by the end of 2024 and 3.9% by mid 2025, up from its current 2.0%. Even at these vacancy levels, it remains well below the market equilibrium of 5.0%.

By city, Adelaide is forecast to have the lowest vacancy over the next 12 months given the subdued supply pipeline, reaching 2.8% by mid 2025, while Sydney and Melbourne are expected to rise to 3.8% and 4.2% respectively over the same period. Brisbane (4.3%) and Perth (4.5%) are anticipated to move higher given the lower commitments for the supply that will enter the market, albeit vacancy is expected to be concentrated in select submarkets. With an above average supply response, our view is that we will begin to see greater bifurcation in the market by building grade. The catalyst behind this stems from a continued focus from occupiers on efficiency and more choice for occupiers. Similarly, vacancy rates will be skewed by big box facilities, while leasing options under 15,000 sqm are expected to remain tight.

Figure 14. Capital City Vacancy Rates (>3,000 sqm)

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

2013 2014 2015 2016 2017 2018 2019 2020 2021

2022 2023 2024

Sydney

Melbourne

Brisbane

Perth

Adelaide

Source: Cushman & Wakefield

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Where to for Rents?

Figure 16. 5-Year Net Face Rental Growth Outlook - Top Markets (2024-2029)

Rank

Submarket

City

Total Growth

5-Year CAGR

1

Central West

Sydney

29.0%

5.8% 5.6% 5.2% 5.2% 5.0% 5.0% 4.9% 4.8% 4.5% 4.5%

At a national level, we are forecasting rental growth of approximately 6.0% for 2024 (noting growth of 2.8% has already been recorded in H1 2024) and 4.8% for 2025 . However, infill markets and other land constrained precincts are forecast to outperform, with growth in the order of 8.0% in 2024 and 6.5% in 2025 . Sydney is forecast to be the outperforming city over this period; led by select infill submarkets.

After an unprecedented run on rents over the past three years, a more nuanced narrative is now unfolding. Instead of all cities following a similar growth trajectory, local market dynamics, especially the supply-demand profile for different types and sizes are exerting more influence. At the same time, most new supply additions are at the larger end of the market (15,000 sqm +), and as a result, the smaller end of the market is expected to see more robust rent growth.

2 3 4 5 6 7 8 9

Trade Coast

Brisbane Sydney Sydney

27.8%

South

26.0% 25.8% 24.8% 24.8% 24.5% 23.8% 22.5% 22.5%

West

South East

Melbourne Melbourne

East

North North

Brisbane

Sydney

East

Perth

10

North West

Sydney

Source: Cushman & Wakefield

CAGR: Compound Annual Growth Rate

Incentives are expected to rise over the next 12 months, however, varying widely by market . Select submarkets in Melbourne, Brisbane and Perth are forecast to see incentives rise between 5.0% and 7.5% - a trend we are already seeing play out in anticipation of the pending supply pipeline. Alternatively, Sydney and Adelaide are forecast

to record a more modest rise in incentives. The outlook for Sydney is underpinned by higher pre-commitment levels, while Adelaide is a more private owner dominated market where incentives tend to fluctuate less than in other cities, often at the expense of softer face net rent growth.

Figure 15. Net Face Rental Growth Forecast by City

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

Year 1

Year 2

Year 3

Year 4

Year 5

Sydney Melbourne Brisbane Adelaide Perth

Source: Cushman & Wakefield

Of the 25 submarkets that we track, four are projected to record prime rental growth of 25% or more (cumulative) over the next five years, headlined by Sydney’s Central West and Brisbane’s Trade Coast submarkets. For Sydney’s Central West, connectivity has improved greatly following the completion of the WestConnex road project which has underpinned

tenant migration from the South Sydney market. In the Trade Coast’s case, supply over the next two years is limited, and growth more broadly for the Brisbane market will be supported by a period of catch-up to the Sydney and Melbourne markets, where more elevated levels of rental growth have been recorded.

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Can Tenants Continue to Keep Paying Higher Rents?

fuel costs. However, real estate can be used as a lever to help control other costs . The ongoing emphasis on greater service levels is underpinning heightened demand for infill and central locations, despite the higher associated real estate costs. Most occupiers are willing to pay more in rent because the location creates more value, particularly on the transport cost side of the equation. Using the average supply chain cost benchmarks, for every 10% increase in rent, operating costs would only increase by around 1% (all else being equal). While this would imply businesses can continue to keep paying higher rents, it is not a one size fits all and occupiers are looking at ways to minimise real estate costs. Warehouse consolidation and a focus on efficiency through logistics cost savings are ways occupiers are achieving this.

Warehouse rents have jumped by almost 70% nationally since the beginning of 2020, while outgoings have increased by 50% over the same period. With the view that rents have further to run given the lack of uncommitted supply, this has prompted the question, “can tenants continue to keep paying higher rents?” To answer this question we have assessed this by: 1. Looking at the share of real estate as part of the overall supply chain cost, including the role that location can play in solving the outbound logistics side of the equation. 2. Assessing how consolidation of warehouse operations can positively impact operational efficiencies. Supply chain costs - where does the money go? Real estate is one of the smallest costs within the supply chain, accounting in most instances for less than 10% of total operational costs. Transport, particularly outbound logistics, is often the largest component of operational costs, which have been compounded in recent years given rising

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Figure 17. Supply Chain Costs by Sector

Figure 18. Warehouse Consolidation Case Study

100.0%

+

=

90.0%

80.0%

70.0%

Warehouse 2 - 10,000 sqm

Warehouse 1 - 10,000 sqm

Warehouse 1 + 2 - 20,000 sqm

60.0%

Outbound Transport

$42.5

Outbound Transport

$42.5

Outbound Transport

$85.0 $30.6 $22.4

50.0%

Inbound Transport

$15.3

Inbound Transport

$15.3

Inbound Transport

DC Fixed Costs

$11.2

DC Fixed Costs

$11.2

DC Fixed Costs

40.0%

DC Variable Costs $20.5 Inventory Holding Costs $10.5 Total Supply Chain Costs $100.0

DC Variable Costs $20.5 Inventory Holding Costs $10.5 Total Supply Chain Costs $100.0

DC Variable Costs $41.0 Inventory Holding Costs $21.0 Total Supply Chain Costs $200.0

30.0%

20.0%

10.0%

0.0%

Transport & Logistics

Consumer Goods

Building Materials

Retail

Pharmaceutical Manufacturing

DC Fixed Costs DC Variable Costs Outbound Transport Inbound Transport Inventory Holding Costs

Source: Cushman & Wakefield

DC fixed costs include net rent | DC variable costs include outgoings and labour costs

The focus will remain on consolidation and efficiency Despite real estate representing only a small share of total supply chain costs, it is a long term commitment. Subsequently, occupiers are looking at their real estate strategy and footprint to maximise operational savings. This includes analysis around the future role of the warehouse in their network, proximity to customers and access to intermodal nodes. More often than not, businesses may discover that the consolidation of warehouse operations is more cost-effective. By consolidating multiple warehouses into one facility, even if it’s of the same size or larger, it can yield significant efficiency gains , subsequently reducing costs and enhancing processes. The reduction in costs stems from lower labour, outgoings and transport costs as it will eliminate trips between multiple facilities and, for the right location, shorter trips to customers.

Breaking down average supply chain costs, figure 18 illustrates a hypothetical scenario (however based on a real life example) where an operator consolidates from two facilities into one of an identical collective size. Assuming total supply chain costs of $100, this scenario shows that despite paying 30% more rent, by consolidating into one facility, there are substantial supply chain cost savings that can be achieved and highlights the scope for tenants to pay more for rent on a per sqm basis.

New Warehouse - 20,000 sqm

Outbound Transport

$63.8 Assumes 75% of existing outbound costs given superior facility location Assumes 80% of existing inbound costs given the removal of transport costs between facilities $24.5 Assumes the rent on the new facility is 30% higher than previous facilities Assumes 75% of variable costs through a reduction in labour and outgoing costs (less land tax, council rates and area maintenance) Assumes they remain unchanged given the need for similar stock levels to service customers $30.8 $21.0 $29.1

Inbound Transport

DC Fixed Costs

DC Variable Costs

Inventory Holding Costs

Total Supply Chain Costs $169.1

Despite paying 30% higher rent for the same size facility, the overall cost savings to an operator are in the order of 15.5% in this scenario.

Source: Cushman & Wakefield

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Solving the outbound logistics side of the equation As highlighted, inbound and outbound logistics costs are the biggest costs for most occupiers , particularly for high volume occupiers such as retailers and transport and logistics operators. For this reason, rather than assessing rent on a rate per sqm basis, an alternative viewpoint is on a rental rate on a population reach basis . Essentially, this measures how much rent you pay to service your 30-minute catchment. While there are multiple other factors that need to be considered, it highlights the logistics benefits and efficiencies for select occupiers. Figure 19 highlights how this is calculated. We note, this metric will not be relevant for occupiers who do not deliver direct to customer (B2C) or those with lower throughput volumes. However, based on recent take-up trends and current enquiry levels, occupiers delivering B2C are expected to represent up to 50% of the demand pool. For this reason, looking at rent through this lens would make more sense for a large number of occupiers. On a population reach basis, rents in South Sydney, for example, are $12.9 per 100,000 residents within the catchment, representing a 40%+ discount to select non-infill markets of Sydney. The catalyst for

this is that South Sydney can service a much larger population in a 30-minute drive time to a non-infill market despite it having the highest gross rents in the country. For this reason, despite the higher rent in inner and central markets, significant supply chain savings can be achieved given reduced transport costs to service the surrounding population. Other markets in Sydney that benefit under this metric include Central West markets such as Rosehill and Homebush. This analysis rings true across all cities, albeit the spread is less pronounced in Melbourne, Perth and Adelaide and reflects the population spread of each city and less variance in rents across submarkets. Outer ring markets tend to serve a separate purpose and the businesses that are seeking distribution centres in these markets aren't B2C, but rather business-to-business (B2B), either to another warehouse or retail network.

Figure 20. Prime Gross Rent Per 100,000 Residents, by Select Precincts

$30

$25

$20

$15

$10

$5

$0

Direk

Wacol

Netley

Naval Base Malaga

Mascot

Gillman

Moorebank Rosehill

Berrinba

Dandenong South Clayton South Eagle Farm Brendale

Wangara

Jandakot

Kemps Creek Ingleburn

Campbellfield Truganina

Welshpool

Bundamba

Tottenham

Port Melbourne Tullamarine

Acacia Ridge

Huntingwood

Eastern Creek

Sydney

Melbourne

Brisbane

Perth

Adelaide

Source: Cushman & Wakefield

What does this mean? When an occupier assesses a location to provide B2C customer fulfillment, the assessment criteria moves away from rent on a sqm basis. In most cases, access to population takes precedence over rent in a traditional sense given the cost savings it can provide in other parts of the supply chain. Using this metric, it supports the continued rental growth for infill markets and the view that occupiers can pay higher rents; however, they are looking at the bigger picture to do so, including focusing on: • Achieving supply chain efficiencies and optimisation through warehouse footprint reduction and new technologies to reduce labour costs.

• Choosing locations that are strategic to their business operations where more customers can be reached in a shorter period of time, thereby reducing the biggest piece of the cost pie – inbound and outbound logistics costs. • Adopting hub-and-spoke distribution models, which incorporates an inner-city transport hub linked to a larger distribution fulfillment centre. Under this approach, smaller and more efficient vehicles can be utilised in infill markets which will facilitate faster delivery times and reduced costs across the last mile.

Figure 19. Rent on a Population Reach Basis - How much rent you pay per 100,000 people within a 30-minute drive

Current gross rent per sqm (No. of people within a 30 min drive time/100,000) =

Rate per 100,000 people

Source: Cushman & Wakefield

Gross rental efficiency based on how much rent you need to pay to access 100,000 people

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Automation & Technology - Options & Impacts

While the shift to automation has occurred in various forms over the past two decades, the rate of take-up in recent years has accelerated and reflects a combination of a drive for efficiencies and declining investment costs, which have driven faster returns on investment. No single solution exists, and the business case for automation must be considered on a case by-case basis, taking into account the existing facility, current lease term, and business-specific factors such as sector, nature and scale of existing operations. Although the cost of adopting automation and technology is declining, it still remains a significant investment which can prove challenging for small-to-medium sized occupiers. This factor is why larger scale businesses such as supermarkets and national retailers are significantly more advanced on the automation spectrum. However, there are low cost options that can deliver cost savings to occupiers.

Factors for consideration when determining the automation solution include: • The need for speed, scalability, flexibility and portability, fixed and mobile solutions. • Growth of e-commerce has accelerated the adoption of automation; however, B2C and B2B have very different order profiles. • Large quantities of small orders with time critical delivery windows puts pressure on operations to meet service levels and accuracy. • Storing inventory in close proximity to customers comes at a premium real estate cost, driving the need for efficient use of space. • 24/7 operations are challenged by rising labour costs and tightening availability. • Types of logistics developments may require different solutions – design and construct, speculative, brownfields retrofit. • Automation solutions may be informed by constraints on the availability of equipment and longer commissioning times.

Figure 21. Fixed Automation v Mobile Automation

FIXED AUTOMATION

MOBILE & SEMI-MOBILE AUTOMATION

These types of automation tend to be large, bespoke or semi-bespoke, fixed capacity with limited flexibility, and high-price installations. This includes: • Automated storage and retrieval systems (AS/RS) • Automatics sorters • Converyor belts • Robotic palletisers

These types of automation tend to be discrete robotic solutions that work in a range of environments and offer greater flexibility for scaling up/down as needed. Common types include: • Automated Guided Vehicles (AGV) including autonomous forklifts • Autonomous Mobile Robots (AMR) • Specialized/niche automation, such as automated boxing and trailer unloaders

AUTOMATION is generally grouped into two categories:

Source: Cushman & Wakefield

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Figure 22. Select Warehouse Automation Options - Cost v Timeframe to Implement

Automated storage and retrieval systems (AS/RS)

Goods-to-person (GTP) technologies

Cost

Automatic guided vehicles (AGVs)

Palletisers

Automatic sorters

Techonology (predictive analytics, artificial intelligence, machine learning, advanced digitalisation)

Autonomous mobile robots (AMRs)

Robotic picking arms

Drones

Conveyor belts

Warehouse workflows

Timeframe to implement

Source: Cushman & Wakefield

Size of bubble = occupier interest levels

Figure 23. Warehouse Automation Adoption by Sector

Sector

Automation System Adopted

Reason

E-commerce and Retail

Automated storage and retrieval systems (AS/RS), conveyor systems, robotics (pick and place robots), automated guided vehicles (AGVs), and warehouse management systems (WMS). AGVs, AS/RS, warehouse execution systems (WES), and robotic palletisers

The high volume of small orders increases the need for fast delivery and managing returns efficiently.

What does this mean for warehouse demand? As the cost to implement reduces further, automation adoption will become even more pronounced, particularly in sub-10,000 sqm facilities where, historically, the return on investment has been too low to make the investment unfeasible. Greenfield markets and those with pre-commitment availability will be the beneficiaries of further investment in automation . When businesses decide to proceed with automation, particularly fixed automation solutions, it generally results in the need for a new facility so that it can be designed to the bespoke needs of that particular occupier.

Adopting automation in existing facilities is more challenging, given the age profile of stock and limitations in the current design . As a result, the options to implement automation in these locations are largely geared towards mobile or semi-mobile solutions. However, continued strong occupier demand in these locations will drive the need for redevelopment or refurbishment of existing stock, supporting greater take-up into the future. Long term, the drive for operational efficiencies through automation will support warehouse demand over the next decade .

Logistics and Third-Party Logistics (3PL)

Handling diverse inventory, optimising storage space, and improving throughput.

Manufacturing

Conveyor systems, automated sorting systems, AGVs, and WMS.

Just-in-time inventory management, efficient material handling, and reducing production downtime. Maintaining product integrity, managing perishable goods, and ensuring compliance with regulatory standards. Strict regulatory requirements underpin the need for precise inventory management and handling of sensitive products.

Food and Beverage

Temperature-controlled AS/RS, conveyor systems, AGVs, and robotic palletisers.

Pharmaceuticals and Healthcare

Automated storage solutions, robotics, WMS, and track and trace systems

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Not only are warehouses growing in size (the average size of new warehouses completed in Australia has jumped 63% since pre-pandemic averages), but they are also getting taller as there is now a greater emphasis on warehouse height clearances to facilitate increased cubic capacity. As a result of these trends, developers have responded by understanding the end user’s business operations, with the design becoming much more tailored to suit the supply chain requirements of an occupier as well as its

technology and customer requirements. Given building specifications are higher than they have ever been (resulting in higher construction costs), occupiers that require these facilities to meet business objectives, including efficiencies through automation and ESG initiatives to reduce carbon emissions, will be forced to pay an economic rent based on cost. Some of the top design trends being incorporated into warehouses today are highlighted below.

Modern Warehouse Design Trends The way in which a warehouse is used has changed in recent years, brought about by the growth of e-commerce, a focus on sustainability and more bespoke user requirements.

Figure 24. Modern Warehouse Design Case Study

MATERIALS - Prefabricated modules are preferential to manage costs, especially across multiple buildings within estates.

GREEN PUSH - 100% of roof structure to be designed for solar panel loading (weight).

GREEN PUSH - Sustainability is being mandated by building codes as part of the design process. This includes being solar energy ready from day one for 20% of the roof area.

BUILDING HEIGHTS - Standard internal clearance heights are now being constructed up to 14.6 metres. Planning approvals are looking at pushing as far as 16.8 metres on spec facilities.

FUTURE PROOFING - Assets are being built for today but designed for future use, such as incorporating greater electrical load capacity to accommodate future automation requirements.

AUTOMATION AND TECH - Building designs are becoming more bespoke to the user’s requirements. The flatness of the floor and floor load capacity are key for some automation solutions.

GREEN STAR RATINGS - Warehouses with Green Star ratings are more in demand as ESG requirements come to the forefront. In a balanced market, Green Star rated buildings lease faster than non Green Star rated facilities.

AMBIENT STORAGE AREAS

GREEN PUSH - Passive solar design (awning/shade panels) to reduce heat transfer into office spaces.

CHILLER & FREEZER CHAMBERS

DESIGN TRENDS - Higher level of finish being sought by tenants, particularly to main office areas.

GREEN PUSH - Insulation provided to external walls (including standard metal clad walls) to minimise heat transfer and reduce loading on cooling equipment.

AUTOMATION AND TECH - High speed roller doors with internal sliding insulated doors to minimise temperature fluctuation.

GREEN PUSH -Fibre-reinforced green concrete - up to 40% reduction in embodied carbon.

POWER CONSUMPTION - Separated operational areas based on cooling requirements. i.e. Freezer separated from outside by ante-room.

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