Logistics & Industrial Capital Markets 2024 Outlook Report
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AUSTRALIAN SERIES Q1 2024
LOGISTICS & INDUSTRIAL Capital Markets 2024 Outlook
Introduction
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CUSHMAN & WAKEFIELD | LOGISTICS & INDUSTRIAL
Welcome to Cushman & Wakefield’s 2024 Australian Logistics & Industrial (L&I) Capital Markets outlook report. This report will explore the key themes of 2023 and our outlook for the year ahead in light of the current macroeconomic environment.
2023 represented a year of transaction dormancy for commercial real estate, both globally and in Australia, as rising debt costs impacted pricing and, in the absence of a material adjustment to book values, resulted in a mismatch between buyer and vendor price expectations. However, the L&I sector proved more resilient than other mainstream commercial sectors, supported by record levels of income growth, which helped offset the continued expansion of capitalisation rates. As a result, the contraction in investment volumes compared to 2022 was less severe than other mainstream commercial sectors. Much of the sector’s strength lies within the occupier market, which remains heavily undersupplied as demand has far outpaced supply. With high levels of population growth forecast over the next decade and coupled with other structural tailwinds such as e-commerce, infrastructure investment and a continued rebalancing of supply chains, this undersupply is expected to persist.
Led by these thematics, the investment thesis for L&I remains solid, and both local and offshore capital sources are expected to continue to subscribe to the outlook for further growth in the sector. In addition, structural challenges in other sectors will underpin a further reweighting of capital to the sector, and new market entrants will continue to emerge, as was evident in 2023. Looking to 2024, the possibility of rate cuts in the second half of the year offers a substantial upside. A floor in pricing has largely been set, albeit book values still have some further unwinding to play out heading into mid-2024. Notwithstanding this, capital has returned, and investors who sat on the sidelines for much of 2023 have flagged their intention to re-enter the market in early 2024. Active buyers in the first half of 2024 will be able to exploit opportunities posed by the stabilisation of pricing before yield spreads to debt costs and bond yields improve in late 2024 and into 2025.
Luke Crawford Head of Logistics & Industrial Research – AUS Luke.Crawford@cushwake.com +61 421 985 784
Tony Iuliano International Director Head of Logistics & Industrial – ANZ Tony.Iuliano@cushwake.com +61 412 992 830
CAPITAL MARKETS 2024 OUTLOOK
CUSHMAN & WAKEFIELD | LOGISTICS & INDUSTRIAL
Contents
What did the 2024 L&I Capital Markets Outlook survey tell us?
01
23
2024 Outlook
What assets were in demand, and will this change in 2024?
03 Australian L&I 2024 Outlook Timeline
28
Where does current pricing sit, and what does 2024 look like?
05 2023 Key Findings
31
Current economic state of play and where is 2024 headed?
33 What is the outlook for capital in 2024?
07
When will capital reactivate and what strategies will investors use to acquire assets in 2024?
What were the key observations in 2023?
1 1
36
Major transactions sold by Cushman & Wakefield in 2023
37 What are the key trends within the debt market?
16
Will occupier demand remain strong in 2024, and where are rents headed?
How did global capital markets perform in 2023?
39
17
What are the top ESG trends that will shape L&I in 2024?
What trends will drive future growth?
43
19
CAPITAL MARKETS 2024 OUTLOOK
2024 Outlook
RBA to pivot in H2 2024, and rate cuts appear likely
Economic growth to slow to 1.2% in 2024
Inflation has come off its peak and will continue to moderate in 2024, albeit the full impact of higher interest rates is yet to wash through the economy. The cash rate is widely viewed to be at its peak, and there is scope for the RBA to pivot to interest rate cuts in the second half of 2024, which will provide relief to household balance sheets.
Economic growth in 2023 proved resilient; however, the outlook for 2024 is contingent on consumer spending, given mounting cost of living pressures. A slow and soft landing for the Australian economy in 2024 remains the baseline scenario, and growth of 1.2% is expected for the year.
High rates of population growth to continue
Outperformance of non-discretionary retail to remain
Population growth continues to underpin the economy, and this will remain the case in 2024. The Federal Government, as part of its Migration Strategy released in late 2023, announced tweaks to the migration system, shifting the composition of migration from students towards workers. Notwithstanding this, population growth in 2024 is forecast to total 1.8% and will continue to support warehouse demand.
Consumers have shifted to non-discretionary retail items in the current environment, and this has led to the outperformance of food retail. This theme will remain in play in 2024 and will generate strong demand for cold storage warehouse space as approximately 40% of goods stocked at supermarkets require cold storage provisions.
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Australia remains attractive to global capital
Greater clarity on pricing will trigger transactional activity
As a result of favourable tailwinds within the L&I sector and with Australia being viewed as a highly attractive and transparent market to deploy capital into, Australia will benefit from an increased flow of funds from offshore markets, particularly from Asia. The weaker Australian dollar is also seen as positive for offshore groups in terms of an entry point into the Australian market.
With interest rates likely to remain flat over the first half of 2024 and cuts expected thereafter, the current yield expansion cycle has run its course. Greater clarity on the outlook for pricing will trigger a pick-up in transactional activity as capital returns in scale.
Rental growth to ease, yet outpace historical benchmarks. Infill to outperform
Pricing premiums for portfolios expected to re-emerge
Pricing premiums for scale were not evident in 2023; however, as capital re-enters the market in 2024, premiums for portfolio opportunities are expected to re-emerge. New offshore capital sources looking to enter the Australian market have flagged their intention to build scale quickly, and both on-market and off-market portfolio opportunities will be highly pursued in 2024.
Rental growth in 2024 is forecast to ease from the 20%+ levels recorded over the past two years as a pick-up in supply will facilitate additional leasing options to prospective tenants. However, a two-speed market will emerge, and infill precincts where supply will remain low will outperform. At a national level, rents are forecast to grow by ~6.0% in 2024, while select infill markets are forecast to record growth closer to 8.5% - 10.0%.
CAPITAL MARKETS 2024 OUTLOOK | 2
Australian Logistics & Industrial 2024 Outlook Timeline
Moderating Economic Growth, Increasing by ~1.2% in 2024
‘Mortgage Cli’ Eases Consumer Spending
Unemployment moves back above 4%
Credit Tightening Continues Amid TFF Repayment
Core Inflation Improves towards 3%
Excess Savings Dwindles
L&I Yields Stabilise
Capital Returns in Scale and Transactions Gain Momentum
Book Values Unwind Further and Bid - Ask Spread Narrows
Q1 2024
Q2 2024
Q3
Mac
Source: Cushman & Wakefield. TTF: Term Funding Facility
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Consumer and Business Confidence Gradually Improve
g by ~1.2% in 2024
CRE Credit Starts to Thaw and Flow
Consumer and Business Confidence Gradually Improve
ck above 4%
CRE Credit Starts to Thaw and Flow
10Y Bonds Drop Back Below 4% (Mid to High 3s% Thereafter)
10Y Bonds Drop Back Below 4% (Mid to High 3s% Thereafter)
RBA Pivots and Starts Rate Cutting Cycle
RBA Pivots and Starts Rate Cutting Cycle
sactions Gain Momentum
L&I Yield Compression Cycle Begins
L&I Yield Compression Cycle Begins
2024
Q4 2024
Q1 2025
Q3 2024
Q4 2024
Q1 2025
croeconomic Indicator
Financial Markets Indicator
CRE Debt Markets Indicator
CRE Capital Markets Indicator
Macroeconomic Indicator
Financial Markets Indicator
CRE Debt Markets Indicator
CRE Capital Markets Indicator
CAPITAL MARKETS 2024 OUTLOOK | 4
$10 $12 $14 $16 $18 $20
2023 Key Findings
$0 $2 $4 $6 $8
Figure 1. National Logistics & Industrial Investment Volumes (>$10 million) - $bn 2013 2014 2015 2014 2016 2017 2018 2019 2020 2021 2022
$10 $12 $14 $16 $18 $20
Sydney
Melbourne
Brisbane
Perth
Adelaide
10-Year Average
$0 $2 $4 $6 $8
2013 2014 2015 2016 2017 2018 2019 2020 2021
2022 2023
Sydney
Melbourne
Brisbane
Perth
Adelaide
10-Year Average
Source: Cushman & Wakefield
0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 4,500,000 5,000,000 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Figure 2. National Logistics & Industrial Gross Take-up (millions)
PERTH
Millions
2013 2014 2015 2016 2017 2018 2019 2020 2021
2022 2023
1.0 1.5
Sydney
Melbourne
Brisbane
Perth
Adelaide
10-Year Average
0.0 0.5
2013 2014 2015 2016 2017 2018 2019 2020 2021
2022 2023
Sydney
Melbourne
Brisbane
Adelaide
Perth
10-Year Average
Source: Cushman & Wakefield
National
2023 total investment volumes (>$10m) $5.1 billion
Total sold 142 assets
Average asset price $35.6 million
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2023 Investment Volumes $620.1 million
2023 Gross Take-up 784,440 sqm
BRISBANE
Q4 2023 Vacancy Rate 1.9%
2023 Prime Rent Growth 22.4%
2023 Investment Volumes $2.5 billion
2023 Gross Take-up 1,057,804 sqm
BRISBANE
SYDNEY
ADELAIDE
Q4 2023 Vacancy Rate 0.6%
2023 Prime Rent Growth 24.2%
SYDNEY
MELBOURNE
2023 Investment Volumes $1.7 billion
2023 Gross Take-up 1,404,454 sqm
2023 Investment Volumes $143.0 million
2023 Gross Take-up 273,956 sqm
MELBOURNE
PERTH
2023 Investment Volumes $137.5 million
2023 Gross Take-up 109,559 sqm
Q4 2023 Vacancy Rate 1.2%
2023 Prime Rent Growth 23.2%
Q4 2023 Vacancy Rate 1.7%
2023 Prime Rent Growth 15.9%
ADELAIDE
Q4 2023 Vacancy Rate 1.6%
2023 Prime Rent Growth 13.1%
CAPITAL MARKETS 2024 OUTLOOK | 6
Current economic state of play and where is 2024 headed?
Mixed economic indicators; however, inflation continues to fall Across the key economic indicators, 2023 was very much a mixed bag, all of which had varying fortunes for the Australian L&I sector. High levels of inflation and the subsequent increases in the cash rate were the key talking points, the latter having a material impact on pricing as indicative funding costs rose above 6.0%. Inflation has come off its peak, and the monetary policy tightening cycle is widely viewed to have ended.
However, the impact of higher interest rates is yet to fully pass through the economy. While there is some disagreement from economists around the path for interest rates in 2024, the general consensus is that the RBA will pivot to rate cuts in late 2024. Together with 10-year bond yields falling from cyclical highs of almost 5.0% in November 2023, it will provide greater pricing certainty to investors in 2024 and encourage capital to re-activate.
Figure 3. Australia Inflation Forecast
-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%
RBA Target Band
Dec-2025
Dec-2023
Dec-2021
Dec-2019
Dec-2017
Dec-2013
Dec-2009
Dec-2015
Dec-2011
Dec-2007
Dec-2005
Dec-2003
Source: ABS, Oxford Economics, Cushman & Wakefield
Figure 4. Australia Interest Rate Forecast
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%
Dec-2014
Dec-2013
Dec-2015
Dec-2020
Dec-2022
Dec-2019
Dec-2016
Dec-2017
Dec-2025
Dec-2021
Dec-2023
Dec-2018
Dec-2024
Source: RBA, Oxford Economics, Cushman & Wakefield
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Economic growth to slow in 2024, albeit a recession appears unlikely More broadly, economic growth has slowed to 2.1% year-on-year to September 2023 and is expected to slow further in 2024 to 1.2% (Oxford Economics). As per Moody’s Analytics, the probability of a recession in Australia over the next 12 months has come off recent peaks and now stands at less than 5.0%. This and other economic indicators suggest that the Australian economy is set to experience a soft
landing in 2024. In contrast, key markets such as the US are set to fall into recession in 2024, with real GDP growth of -0.3% expected. A downside risk to the Australian economy is the outlook for economic growth in China. Since the GFC, China has been the main recipient of Australia’s exports, receiving circa 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 weigh on exports.
Figure 5. Australia GDP Growth Forecast
-8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%
Dec-2011
Dec-2017
Dec-2021
Dec-2015
Dec-2013
Dec-2019
Dec-2023
Dec-2025
Dec-2007
Dec-2005
Dec-2003
Dec-2009
Source: ABS, RBA, Cushman & Wakefield
CAPITAL MARKETS 2024 OUTLOOK | 8
Population growth has increased sharply, led by overseas students Population growth will provide the backbone to economic growth in 2024, and in fact, if you strip out population growth, per capita GDP is declining. In the year to June 2023, Australia’s population grew by 624,100 people (2.4%), making it one of the fastest growing advanced countries.
Going forward, Australia is forecast to record one of the highest rates of population growth globally over the next decade at 1.5% per annum, while most major markets are forecast to see growth of less than 0.5% per annum. With most new migrants into the country initially residing in inner and middle ring apartments, it will help fuel the demand for infill warehouse space, which provides quick access to densely populated centres.
Figure 6. Australia Annual Population Growth, Historical & Forecast
0 100 200 300 400 500 600 700
2017
2021
2015
2013
2031
2018
2016
2019
2014
2027
2022
2025
2032
2023
2033
2028
2026
2029
2024
2020
2030
Source: Oxford Economics, Cushman & Wakefield
Figure 7. Global Population Growth Comparison, Historical & Forecast
1.3% 1.5%
-0.5% -0.3% -0.1% 0.1% 0.3% 0.5% 0.7% 0.9% 1.1%
Australia Canada Global Average
India
Hong Kong
United Kingdom
Singapore United States
France Germany
South Korea
Japan
Past 10-years 10-Year Forecast
Source: Oxford Economics, IMF, Cushman & Wakefield Research
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Consumer spending to slow further as households reign in their budget Although businesses have been resilient in the face of interest rate hikes, higher financing costs are taking their toll on households. The impact of higher interest rates can now be seen in the data – consumer sentiment remains around recessionary levels, and retail turnover has slowed remarkedly. More recently, this has led to a shift to non-discretionary retail categories, including food, which bodes well for the continued growth of the cold storage market in Australia.
Consumer spending habits are forecast to remain constrained in the first half of 2024 before improvements are recorded later in 2024. However, for the L&I sector, weaker consumer spending will flow through to warehouse demand, particularly as the retail trade sector has been the second most active sector in the leasing market since 2020. Offsetting this, however, will be a continued focus on efficiency, which will drive pre-commitment demand as businesses adopt automation strategies.
Figure 8. Australia Moving Annual Total Retail Turnover (rolling year-on-year change)
10% 12% 14%
0% 2% 4% 6% 8%
Nov-2013
Nov-2015
Nov-2017
Nov-2019
Nov-2021
Nov-2018
Nov-2016
Nov-2014
Nov-2022
Nov-2023
Nov-2020
Source: ABS, Cushman & Wakefield
CAPITAL MARKETS 2024 OUTLOOK | 10
What were the key observations in 2023?
Transaction volumes fall, although L&I proved to be more resilient 2023 represented a period of dislocation for the global commercial real estate sector given the divergent bid-ask spread, and investment volumes were severely impacted by rising debt costs and challenging economic conditions. However, for the Australian L&I sector, the market demonstrated its resilience, and overall investment volumes remained largely on par with the annual average recorded since
the GFC, albeit it fell from the record levels recorded in 2021 and 2022. For the year, approximately $5.1 billion in assets traded (for deals above $10 million), largely on par with pre-COVID averages as offshore capital, largely via local managers, continued to subscribe to the outlook for further growth in the sector. Compared to 2022, L&I volumes fell by 32%, and is in contrast more material falls in the office and retail sectors.
Figure 9. Australian Commercial Real Estate Transaction Volumes YoY (>$10 million)
L&I
Retail
O ce
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
Source: RCA, Cushman & Wakefield
11 | CUSHMAN & WAKEFIELD | LOGISTICS & INDUSTRIAL
Asset pricing remained the key theme
Asset pricing was the key theme for 2023 as higher debt costs and rising bond yields continued to impact capitalisation rates. In most cases, buyers were generally unable to meet vendor book values, which have yet to record the level of yield softening required to trigger greater participation in light of where debt costs sit. Significant levels of rental growth have meant asset values are being maintained, and sharper initial yields were paid for assets where the rental uplift could be accessed in the short term.
Figure 10. Initial Yields vs Market Yields
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
3.0%
2019
2020
2021
2022
2023
Initial Yield
Market Yield
Source: Cushman & Wakefield
Figure 11. 10-year Government Bond Yield vs. Prime National L&I Yield
12.0%
600
10.0%
500
8.0%
400
6.0%
300
4.0%
200
2.0%
100
0.0%
0
Dec-11
Dec-17
Dec-21
Dec-15
Dec-13
Dec-19
Dec-01
Dec-23
Dec-97
Dec-95
Dec-93
Dec-99
Dec-07
Dec-05
Dec-03
Dec-09
Spread (RHS)
10 year Govt. Bond Yield
National L&I Prime Yield
CAPITAL MARKETS 2024 OUTLOOK | 12
Source: MSCI, RBA, Cushman & Wakefield
Short WALE infill assets were highly sought
However, given the disconnect between buyer and vendor expectations, most of these processes did not trade. Processes that succeeded included a recapitalisation of Mirvac’s Switchyard Estate at Auburn, which Australian Retirement Trust bought for $177.3 million. Domestic unlisted funds, largely on behalf of offshore capital and privates were the most active Domestic unlisted funds were the dominant purchaser type in 2023, acquiring over $1.0 billion of assets for the year. However, in almost all cases, these acquisitions were backed by offshore capital sources and included but not limited to Gateway Capital with Cadillac Fairview, Centennial with Brookfield and Pittwater Industrial with Washington State Investment Board. Consistent with the post-GFC trend, private investors were the second most active buyers in 2023; however, 90% of assets bought (by number) by these privates were sub $40 million acquisitions. Notably, private investors were more passive in 2021 and 2022 as institutional groups were more aggressive on pricing, and the recent pick-up in private investor activity reflects tighter credit conditions and weaker participation from institutional groups in 2023, particularly AREITs.
Buyer participation was strongest for assets that offered immediate or short-term positive rental reversion. Given the level of rental growth, passing rents on select assets which traded were in excess of 30% below market rents. Alternatively, participation for core assets, particularly if access to market growth was unavailable beyond a three-year period, was more challenged. Regional capital continues to grow The long-term fundamentals of the Australian L&I sector are strong, and despite short-term volatility in economic conditions, investors are taking a five-plus-year view of the market and are planning to increase their allocations to the sector in 2024. We have identified $45 billion in capital seeking L&I assets in Australia, most of which are ready to deploy. Activation of this capital is expected in mid-2024 once yields stabilise and the bid-ask spread narrows. Multiple recapitalisations were offered to the market In 2023, there was well over $3.0 billion in recapitalisations offered to the market as capital sought liquidity and managers sought to keep funds under management.
Figure 12. Average Asset Size by State ($m)
$10.0 $15.0 $20.0 $25.0 $30.0 $35.0 $40.0 $45.0 $50.0
$0.0 $5.0
Sydney
Melbourne
Brisbane
Perth
Adelaide
Source: Cushman & Wakefield
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Figure 13. 2023 L&I Buyer & Vendor Profile ($bn)
$1.5
$1.0
$0.5
- $0.0
-$0.5
-$1.0
-$1.5
-$2.0
Unlisted Fund
O shore Direct
AREIT
Super Fund
Private
Corporate
Government
Buyer
Vendor
Source: Cushman & Wakefield
Participation from Australian superannuation funds continues to gain momentum as they shift their investment structure to have more direct exposure to the sector, and as a result, almost $750 million was acquired from such investors in 2023. This was underpinned by UniSuper and Australian Retirement Trust. Single smaller assets dominated investment volumes Following several significant portfolios offered to the market in recent years, 2023 was characterised by smaller single asset trades with the average price point being $35.6 million. By comparison, in 2021 before rate rises impacted the market, the average price point of assets to trade was closer to $50 million. The catalyst for this has been the reluctance of groups to trade their L&I assets, as well as most active capital being focused on infill markets, which tend to be smaller asset sizes with regards to GLA compared to big box warehouses in the outer ring markets. Alternatively, there were seven portfolio transactions totalling almost $1.3 billion, down from the levels recorded in 2021 and a 7% drop from 2022 levels.
CAPITAL MARKETS 2024 OUTLOOK | 14
Figure 14. National Portfolio Transactions, 2018 - 2023 ($bn)
12 14 16 18 20
$12.0
$10.0
$8.0
$6.0
4 6 8 10
$4.0
$2.0
0 2
$0.0
2018
2019
2020
2021
2022
2023
Portfolio Volume ($b)
No. of Portfolios (RHS)
Source: Cushman & Wakefield
The lack of leasing options continues to support rental growth; however, the pace of growth has slowed Occupier demand remained healthy in 2023, with just over 3.5 million sqm of take-up recorded across the market (deals above 3,000 sqm). However, despite an increase in supply, vacancy rates in 2023 remained close to historic lows, which supported rental growth well above historical benchmarks.
As of Q4 2023, the national L&I vacancy rate measured 1.2%, and is well below the market equilibrium of 5.0%. As a result, national weighted prime rents grew by 21.7% in 2023, with the Sydney and Melbourne markets outperforming this. More recently, the pace of rental growth has eased with growth of 3.0% recorded in Q4 2023, down from the 5.1% quarterly average recorded since late 2021.
Figure 15. National L&I Vacancy Rate
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Jun-21
Mar-21
Sep-21
Dec-21
Jun-22
Jun-23
Mar-23
Mar-22
Jun-20
Sep-22
Dec-22
Sep-23
Dec-23
Sep-20
Dec-20
Source: Cushman & Wakefield
Based on buildings with a GLA >3,000 sqm
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Major transactions sold by Cushman & Wakefield in 2023
Largest Portfolio Transaction of 2023
Largest Individual Asset Sale of 2023
Australian Industrial Partnership Portfolio Greystanes, NSW & Truganina Industrial Estate, VIC • Sale Price: $560 million • 50% interest (tenants in common) in 20 prime, modern industrial assets within two pre-eminent logistics estates in Greystanes, NSW and Truganina, VIC. • Portfolio WALE of 3.3 years with $12.6 million of positive reversion accessible in the next four years. • Acquired by UniSuper with investment manager Richmond Bridge.
Axxess Corporate Park Mount Waverley, VIC • Sale Price: $315 million • Mixed-use corporate park incorporating a diverse range of tenancies including offices, warehouses, retail space and a childcare centre. • Seed asset for Gateway Capital & Cadillac Fairview’s new investment vehicle – the Gateway Capital Urban Logistics Partnership (GULP). • Diversified income profile across 100+ tenants – mix of national/international listed companies, Government, not-for profits and private entities.
CAPITAL MARKETS 2024 OUTLOOK | 16
How did global capital markets perform in 2023?
2023 was a challenging year for capital markets globally with dealmaking paralysed by the standoff between potential buyers and sellers on pricing. The decline in asset values that began in 2022 proliferated further in 2023, and illiquidity occurred in many regions and markets. Globally, investment volumes across the core commercial real estate sectors (L&I, Office,
Retail and Hotels) fell 40% in 2023 when compared to 2022 levels, albeit there were large variances by region. Liquidity was greatest in the APAC region, with a 27% fall recorded, while the Americas and Europe, the Middle East and Africa (EMEA) saw falls of 43% and 45% respectively.
Figure 16. Global Commercial Real Estate Transaction by Region ($AUD – Rolling Annual - $Bn)
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
Mar-17
Mar-21
Mar-14
Mar-15
Sep-15
Mar-16
Mar-19
Sep-17
Mar-18
Sep-18
Sep-21
Sep-14
Sep-16
Sep-19
Mar-22
Sep-22
Mar-23
Sep-23
Mar-20
Sep-20
EMEA Americas
APAC
Source: MSCI, Cushman & Wakefield Includes L&I, Office, Retail and Hotel sectors
Looking at the L&I sector globally, a similar trend played out, with APAC proving to be more resilient with a 26% fall in transaction volumes compared to 2022, while EMEA was the worst hit with a 44% fall. In the Americas, L&I transaction volumes fell by 38% compared to 2022 volumes. However, context matters and overlaying 2023 L&I investment volumes against pre-COVID average annual volumes shows that with the exception of EMEA, both investment volumes in the Americas and APAC regions in 2023 are in excess of 50% above their pre-COVID average (2010-2019 average).
The most interesting trend to emerge in recent years has been the share of L&I transactions in global capital markets. Historically, the L&I sector accounted for an average of 16% of global commercial investment volumes across the L&I, Office, Retail and Hotel sectors; however, structural tailwinds in recent years have underpinned a capital allocation shift and L&I has accounted for just over one-third of all global transactions by value since the beginning of 2020.
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Figure 17. Global 2023 L&I Transaction Volumes by Region Compared to Different Periods
80.0%
64.4%
57.5%
60.0%
41.5%
40.0%
20.0%
0.0%
0.0%
-20.0%
- 25.7%
-40.0%
- 37.2%
- 38.1%
- 44.4%
-60.0%
EMEA
Americas
APAC
Total
% Change from Pre-COVID average
% Change from 2022
Source: MSCI, Cushman & Wakefield
Figure 18. Share of L&I Transaction Volumes Globally, Rolling Annual
40%
35%
30%
25%
20%
15%
10%
5%
0%
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Source: MSCI, Cushman & Wakefield
CAPITAL MARKETS 2024 OUTLOOK | 18
What trends will drive future growth?
The events of recent years, including the rapid growth of e-commerce and a focus on supply chain resilience and automation, have transformed the L&I sector. In tandem with broader trends such as rapid population growth, urbanisation, and Australia’s position within the Asia Pacific region, the largest and fastest growing region in the world, highlights the future growth potential of the sector. These tailwinds over the long term will amplify the demand for warehouse space and, in turn, will continue to lead to a large re-weighting of capital towards the sector. As a result of these structural tailwinds, historical benchmarks are no longer as relevant for the sector. Population Growth Based on our analysis of population-driven demand over the next decade against the known supply pipeline, by 2033 there will be an estimated cumulative shortfall of warehouse space in the order of 10 million sqm.
While additional supply beyond our current estimates will be brought online, based on the current experience where there are significant planning and servicing delays across the market, it is unlikely that enough supply will come online to satisfy demand. Given a shortage of industrial land, urbanisation has led to the development of multi-level warehouse facilities, particularly in the Sydney market. At present, there is over one million sqm of multi-level warehouse space in the pipeline at various stages, with the first facility of this kind, Goodman’s 45 Burrows Road, Alexandria development (AXIS), reaching completion in late 2023. The prevalence of multi-level warehouse facilities will continue to transform infill industrial markets as developers look to maximise their underlying land value.
Figure 19. National Cumulative Shortfall of Warehouse Stock Required
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
-10,000,000 -9,000,000 -8,000,000 -7,000,000 -6,000,000 -5,000,000 -4,000,000 -3,000,000 -2,000,000 -1,000,000 -
Source: ABS, Oxford Economics, Cushman & Wakefield
19 | CUSHMAN & WAKEFIELD | LOGISTICS & INDUSTRIAL
E-Commerce In 2023, the share of the online retail penetration rate moderately fell; however, there has more recently been an uptick recorded, with the penetration rate currently at 12.8%. Online retail sales are expected to grow by $17.2 billion by the end of 2027, resulting in warehouse demand of 1.38 million sqm over the period. At this point, the penetration rate in Australia is forecast to total 16.5%.
Growth in online food sales will underpin the growth of e-commerce over the next five years. The online food sector has grown by approximately 30% per annum since 2017, with Australians currently spending almost $12 billion on online food goods. Significant growth is forecasted to continue, with online food sales expected to reach $19.5 billion by 2027.
Figure 20. Australian E-Commerce Market ($bn)
$20 $30 $40 $50 $60 $70 $80
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
$0 $10
2011
2021
2017
2012
2015
2013
2018
2016
2019
2014
2027
2022
2025
2023
2026
2024
2020
Annual Online Spend
Penetration Rate (RHS)
Source: Statista, NAB, Cushman & Wakefield
CAPITAL MARKETS 2024 OUTLOOK | 20
Food Logistics Over the long term, food turnover has proven to be highly resilient, particularly in changing and uncertain times as consumers shift spending patterns towards non-discretionary retail items. Over the past 40 years, expenditure on food retailing has grown by 6.3% per annum, which outpaced the 5.1% recorded for discretionary retail items over the same period.
With macro headwinds increasing, the outperformance of food retail is
expected to persist. This outperformance has driven significant investment flows into the sector in search of food-grade logistics facilities, with cold storage and food-based covenants being a key focus for investors.
Figure 21. Food vs Discretionary retail (Indexed to 100 in 1982)
1200
1000
800
600
400
200
0
2011
1991
2017
1993
1995
1997
1985
1987
1983
2019
2021
2015
2013
1989
1999
2001
2023
2005
2007
2003
2009
Non-Food
Food
Source: ABS
Infrastructure Investment A significant investment in transport
industrial development once infrastructure goes in. Nationally, the transport infrastructure pipeline stands at approximately $330 billion (Deloitte Access Economics), dominated by rail and road infrastructure projects. The East Coast states account for approximately 85% of the national investment.
infrastructure is both underway and planned across the country, which has and will continue to act as a catalyst for warehouse demand. Long term, areas that were once considered secondary would become more sought after, and new precincts would become available for
Figure 22. Australian Transport Infrastructure Pipeline ($Bn)
$0 $20 $40 $60 $80 $100 $120 $140
NSW
VIC
QLD
WA
SA
Other
Airport
Rail
Road
Source: Deloitte Access Economics
21 | CUSHMAN & WAKEFIELD | LOGISTICS & INDUSTRIAL
Asia Pacific (APAC) – the global growth engine Australia is widely viewed as an integral member of the APAC region and is well-placed to capitalise on further growth going forward. As per Moody’s forecasts, growth in the region is forecast to total 3.5% to 4.0% in 2024 and compares to the global forecast of 2.9% and 1.4% for advanced economies over the same period.
Beyond the economic forecasts, the demographics of the region are changing quickly, including a rapidly growing and affluent middle class. Analysis by Statista shows that by 2030, the middle-class population in the Asia Pacific region is expected to increase from 1.3 billion people in 2015 to 3.5 billion people. At this point in time, the Asia-Pacific region will account for 65% of the globe’s middle-class segment, up from just 30% in 2010.
Figure 23. Global Middle Class Population from 2015-2030 (millions)
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Asia-Pacific
Europe
Americas
Middle East and North Africa
Sub-Saharan Africa
2015
2020 2025
2030
Source: Statista, Cushman & Wakefield
CAPITAL MARKETS 2024 OUTLOOK | 22
What did the 2024 L&I Capital Markets Outlook survey tell us?
of investors favour the L&I sector over other commercial sectors 86%
There was an almost even split between investors selecting Melbourne and Brisbane as their preferred city with the foreign owner land tax surcharge likely to be the catalyst behind Melbourne falling below Sydney. Sydney is the preferred city for investment in 2024 SYD
REITs, super funds, and private equity funds were the dominant respondents who intend to acquire assets in 2024. of investors intend to deploy capital into L&I assets in Australia in 2024 89%
of investors intend to deploy this capital in the first half of 2024 84%
Debt and alternatives represent the next preferred sectors for investment.
The bulk of this capital intends to be deployed in Q1 2024, with results
flagging that unlisted funds are expected to be the most active over this period.
23 | CUSHMAN & WAKEFIELD | LOGISTICS & INDUSTRIAL
To understand client challenges and their outlook for 2024, we undertook a L&I Capital Markets survey in late 2023. The sample size covered investors across a broad geography base and investor spectrum.
The mismatch between buyer and vendor expectations was the primary factor preventing investors from deploying capital during 2023. 50% of investors said the missmatch in pricing is preventing them deploying capital
Offshore investors and domestic unlisted funds were more aggressive in their outlook for yields over the next six months. of investors expect less than 25 basis points of further yield softening 65%
Despite the continued economic uncertainty forecast in 2024, investors remain willing to move up the risk curve to obtain increased returns, with over 60% of investors being very interested in core plus and value-add opportunities. of investors very interested in core plus and value-add opportunities 63%
of investors intend to divest assets in 2024 26%
Of the investors who intend to divest, 55% were privates/developers or unlisted funds.
CAPITAL MARKETS 2024 OUTLOOK | 24
2024 Australian Preferred Asset Class
Investment Intentions in 2024 by Investor Type (% of respondents by investor)
Q.
Q.
What asset class interests you the most (1 being most interested and 6 being least interested)
Based on current expectations, does your organisation intend to deploy capital into L&I in 2024?
Developer
L&I
Sovereign Wealth Fund
Debt
High Net Worth Individual/Family Oce Syndicate
Alternatives
Unlisted Fund
Retail
Private Equity
O ce
Super Fund
Hotel
REIT
0% 20% 40% 60% 80% 100%
0% 20% 40% 60% 80% 100%
1
2 3 4 5 6
Yes No I don't know
Source: Cushman & Wakefield
Source: Cushman & Wakefield
Most Preferred L&I Investment Locations for 2024
Timing of Planned 2024 Acquisitions
Q.
Q.
If you were to deploy capital into L&I in 2024, which city would be your preferred destination?
If you intend to deploy capital in 2024, which quarter do you anticipate your first transaction to be in?
60%
5%
50%
11%
Q1 2024
40%
Q2 2024
46%
30%
Q3 2024
20%
Q4 2024
38%
10%
0%
Source: Cushman & Wakefield
Perth
Sydney
Brisbane
Adelaide
Melbourne 1st Choice
2nd Choice
Source: Cushman & Wakefield
25 | CUSHMAN & WAKEFIELD | LOGISTICS & INDUSTRIAL
Divestment Intentions in 2024
2024 Risk Profile
Q.
profiles? Q.
Based on current expectations, do you intend on divesting L&I assets in 2024?
How interested are you in these risk
80%
Development
70%
Value Add
60%
50%
Core Plus
40%
Core
30%
0%
50%
100%
20%
Very interested Somewhat interested Neutral
Not very interested Not interested at all
10%
0%
No
Yes
I don't know
Source: Cushman & Wakefield
Source: Cushman & Wakefield
2024 Cap Rate Outlook
Q.
What do you expect the movement in cap rates to be over the next six months?
75+ basis point expansion
50-75 basis point expansion
25-50 basis point expansion
0-25 basis point expansion
Remain the same
0-25 basis point compression
0%
5%
10%
15%
20%
25%
30%
35%
Source: Cushman & Wakefield
CAPITAL MARKETS 2024 OUTLOOK | 26
Top Issues Impacting Investing Immediately
What are the primary factors preventing you from investing in L&I immediately? Q.
Mismatch between our expectations on price and vendor expectations
Lack of suitable stock
Central Bank policy decisions - Cost of debt
40%
20%
14%
Cap rates increasing
Access to capital
14%
12%
27 | CUSHMAN & WAKEFIELD | LOGISTICS & INDUSTRIAL
What assets were in demand, and will this change in 2024?
Short WALE assets were aggressively chased – a trend that will continue Given the outperformance of rental growth, the majority of active capital in 2023 was focused on short WALE assets in infill markets. As a result, 61% of investment volumes for the year stemmed from infill market assets and compares to 2020 at just 39% of investment volumes.
With rent growth in infill markets forecast to outperform given more modest levels of supply, this trend is forecast to remain in 2024. Long WALE assets recorded limited buyer participation, particularly if access to market rental growth was unavailable through market rent reviews. As a result, the average WALE of assets to trade has halved since 2019, sitting at 4.79 years nationally in 2023, with both Sydney and Melbourne sitting under this average.
Figure 24. National Infill vs Non-Infill Transactions (by Volume)
2024
2023
2022
2021
2020
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Infill
Non-Infill
Source: Cushman & Wakefield
Figure 25. Average WALE by City, 2019 vs 2023
SA
WA
QLD
VIC
NSW
National
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Years
2019
2023
Source: Cushman & Wakefield
CAPITAL MARKETS 2024 OUTLOOK | 28
Shift back to long WALE expected in 2024 Looking at 2024, short WALE assets that offer positive income reversion in infill markets are expected to remain aggressively sought. However, the re-activation of capital chasing core product is expected to shift in 2024, and a focus on quality long WALE assets is expected to re-emerge as investors reassess risk, with a greater focus on income security. The catalyst for this shift will stem from a reset of pricing through valuations, which will enable vendors to meet the market more appropriately. Portfolios to be the focus of new market entrants High barriers to scale exist in the Australian L&I market, and there have been just six portfolios
sold above $500 million in Australian history. Given this, portfolios will continue to be met with significant demand from groups looking to build scale quickly. In recent years, a premium was paid for portfolios, and our analysis suggests this was in the order of 50-85 basis points. While pricing premiums for scale were not evident in 2023, as most transactions were for sub $100 million individual assets, pricing premiums for portfolio opportunities are expected to re-emerge in 2024. Several significant offshore investors are looking to enter or expand their presence in the Australian market in 2024 and have flagged their intention to build scale quickly. This will allow them to immediately become a major player in the Australian market and have access to a diversified customer base across a broad geography base.
Figure 26. Portfolio vs Single Asset Market Yields
9.0%
8.0%
Single assets
7.0%
6.0%
5.0%
4.0%
Portfolios
3.0%
2.0%
Jan-19
Jul-19
Feb-20
Aug-20
Mar-21
Sep-21
Apr-22
Nov-22
May-23
Dec-23
Source: Cushman & Wakefield
29 | CUSHMAN & WAKEFIELD | LOGISTICS & INDUSTRIAL
Growing appetite for defensive assets Due to the current economic climate, a shift to defensive assets is expected to occur in 2024, as was evident in 2020. Ultimately, this will mean tenant covenant strength will come back into the spotlight, and owners will become more proactive in the tenancy mix within their portfolio with a focus on non-discretionary occupiers. Notably, this includes food and beverage based occupiers such as the major supermarkets and pharmaceutical and healthcare businesses. Cold storage to remain a focus In response to solid fundamentals and a shortage of cold storage warehouse space, there has been a continued influx of capital seeking opportunities in the sector.
In 2023, over $300 million of cold storage assets traded, underpinned by 115 Jedda Road, Prestons, which Centennial purchased for $79 million from Charter Hall. In a global context, Australia remains heavily undersupplied. On a per capita basis, Australia has just 0.38 cubic metres of cold storage warehousing space, well under the global average of 0.47 cubic metres per capita (Global Cold Chain Alliance). To reach the global average, Australia would need to build another 1.9 million cubic metres of cold storage - equivalent to 23% of current stock levels.
Figure 27. Australian Cold Storage Transaction Volumes ($m)
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
2019
2020
2021
2022
2023
Source: Cushman & Wakefield
CAPITAL MARKETS 2024 OUTLOOK | 30
Where does current pricing sit, and what does 2024 look like?
In 2023, 115 basis points of prime yield softening was recorded at a national level, largely reflective of the outward movement of debt costs, which are now sitting above 6.0%. Strategies to acquire infill land holdings have also meant there was minimal spread between prime and secondary yields in select locations. This has been most evident in Sydney, where the spread in some precincts is as low as ~60 basis points and compares to the long-term average of 130 basis points.
While there were numerous transactions with initial yields sitting under 5.0% in 2023, core market yields currently sit closer to 5.50% to 6.25%, depending on the market once market rents are factored in. In the absence of rental growth, this would have ordinarily resulted in a ~30% decline in asset values since the outward movement in yields began in early 2022. However, since the beginning of 2022, prime yields have jumped 50.4% nationally, which has assisted in maintaining asset values to some degree.
Figure 28. L&I Prime Core Market Yield Range by City (Q4 2021 vs Q4 2023)
7.00%
6.50%
6.00%
5.50%
5.00%
4.50%
4.00%
3.50%
3.00%
Perth
Perth
Sydney
Sydney
Brisbane
Brisbane
Adelaide
Adelaide
Melbourne
Melbourne
Q4 2021
Q4 2023
Source: Cushman & Wakefield
31 | CUSHMAN & WAKEFIELD | LOGISTICS & INDUSTRIAL
Figure 29. Prime L&I Yields by City
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Jun-22
Jun-23
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-22
Dec-23
Sydney
Melbourne
Brisbane
Perth
Adelaide
Source: Cushman & Wakefield
Will yields rise further in 2024? The outlook for yields remains dependent on where interest rates head in 2024. The RBA is expected to pivot in 2024, and rates are forecast to remain stable in the first half of the year before rate cuts later in 2024. As a result, the market is expected to reach an inflexion point by Q3 2024, where rates and bond yields start moving lower, and credit can flow more freely. Based on the outlook for interest rates, our view is that the yield expansion cycle has run its course, albeit book values through valuations will still need to be adjusted to reflect current pricing.
Greater participation in the market is now expected given that capital has returned, and in tandem with an expected falling interest rate and bond yield environment, there is scope for modest levels of yield compression in early 2025. For secondary assets, it is likely that the yield spread to prime assets widens in 2024 as groups become more selective in light of moderating rental growth. Similar to what is occurring in the office market, a flight to quality is expected to play out in all markets. The outlier to this will be precincts with high underlying land values where secondary assets are bought for redevelopment, as has been the case in markets like the Inner South West of Sydney.
CAPITAL MARKETS 2024 OUTLOOK | 32
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