Rents for warehouses and other industrial assets continue to fall in Western Australia as tenants servicing the previously booming resource sector cut back on space requirements and overall levels of leasing demand drop to decade lows.

According to real estate outfit Savills, last year saw overall levels of leasing activity drop to less than a third of its five-year average along with a fall in prime rents across most regions.

Rents for prime logistics space contracted across all sectors in the first quarter this year, CBRE said, with prime logistics space falling 4.1 per cent in the east and south ($112.50) and two per cent in the north ($108).

Not surprisingly, much of the carnage is a reflection of the winding down of the resources sector construction boom and its subsequent impact upon the broader economy, which has seen space requirements from both resource clients themselves and the manufacturing and logistics companies that serviced them winding back and a shift in tenant focus away from taking on more space and toward consolidation of existing space.

Combined with a significant volume of new stock having come on the market in recent years amid a speculative development surge at the height of the mining boom, this has resulted in a build-up of vacant space and a substantial shift toward tenant friendly leasing market conditions.

Going forward, the near-term outlook is not encouraging. Having expanded by 5.5 per cent in 2013/14, the state’s economy will grow by just 2.25 per cent in both 2014/15 and 2015/16, further impacting consumer demand and thus the need for manufacturing and logistics space.

The continued slowdown in resource construction work, meanwhile, will impact occupants in the heavy machinery and equipment sector which occupies space in the city’s south as well as some of the transport and engineering clients occupying space in the east.

Compounding this will be further growth in yet more space. While CBRE reports that only 67,129 square metres of new space came onto the market in the year to March 2015, it says a further 203,994 square metres will come onto the market in the year to March 2016. This would mark the largest new volume of stock to come onto the market since 2009.

Because of this, commentators expect leasing conditions to remain favourable to tenants. In a recent research report, Savills, for example, said the market would ‘soften further’ as tenants continue to display caution and more supply comes online.

One long-term silver lining on the horizon, however, revolves around a decent program of infrastructure investment, including the Perth CityLink project, the redevelopment of Elizabeth Quay, the Gateway WA Perth Airport and Freight Access Project and the proposed Perth-Darwin Highway.

Not only are these projects expected to assist in accommodating future population growth (and thus demand for merchandise which has to be manufactured, shipped and stored) but the improved transport links are expected to make the city more attractive in terms of operations from the perspective of prospective transport and logistics tenants.

perth warehouse1

perth warehouse

Capital Markets Less Impacted

In contrast to leasing markets, capital markets do not appear to be as badly impacted – at least not yet. More than $400 million worth of industrial sales took place over the 12 months to March according to CBRE – the highest level on record in eight years.

While agents such as Colliers and JLL insist interest remains robust, however, the deal flow appears to have slowed for now, with the $6.69 million sale of Integrity Way in Wangara being the only transaction above $5 million in value to take place in the March quarter.

Moreover, few market participants are optimistic about the immediate outlook. Participants in the Property Council of Australia’s latest Property Industry Confidence Survey said Perth was the only city apart from Canberra where they expected a modest contraction in capital values this year. Savills, meanwhile, says it expects prices to remain ‘relatively unchanged’ in 2015.