The Importance of Being Nearest: how inner-city industrial space is transforming

If you’re a celebrity in New York, an apartment in a Tribeca warehouse conversion is a prized accessory. Taylor Swift has a place there, as does Beyoncé. One apartment block on Greenwich Street recently boasted a roll-up of owners that included Justin Timberlake, Jennifer Lawrence, Harry Styles and Jake Gyllenhaal. Despite their exclusivity today, some of the most prized aspects of these conversions betray their more utilitarian origins – their high ceilings and large windows allowing for natural light and airflow through the crowded workspaces of yesteryear.

From the Embarcadero in San Francisco to Shoreditch in London, and closer to home in suburbs like Docklands in Melbourne, inner-city industrial suburbs across the globe have been transformed into sought-after residential postcodes. Emblematic of this trend was the announcement this year that the City of Sydney will rezone entire blocks of warehouse space in Alexandria to create a new cultural and entertainment precinct.

As residents and developers moved in, traditional industrial tenants have fled to the suburbs, into larger premises with cheaper rent. For retail logistics in particular, this made sense: the stores they were supplying were larger and increasingly located further away from traditional urban centres.

In an interesting reversal, however, the paradigms that forced industrial space out of our city centres and into the suburbs no longer hold true for retail logistics. As sales move online, and the time taken to span the “last mile” from warehouse to consumer becomes the critical metric for retailers, proximity is fast becoming king, and thanks to decades of competition from booming residential markets, space is at a premium.

This isn’t just about the more traditional, package-based model of online retail – It is true even for bulk retailers such as grocery stores – much of the demand for inner-city warehouse space is being driven in Australia by Australia’s largest super-market chains, responding to consumer demands which today require deliveries to be with the customer almost immediately. The trend may well be amplified by the increasingly refined power of retailers to predict purchasing behaviour, and transport and store products in proximity to their customers in anticipation of the purchasing decision, ensuring the right inventory product mix is being warehoused at the right location.

The result, in most major cities, would be a significant shortage of well-located, strategic industrial product. Returns for those who have held on to inner-city industrial space, or taken the time to invest strategically in infill urban logistics, are, in our opinion, likely to be sustained and substantial, further leveraged by trends towards inner-urban living, increasing pace of lifestyles and advances in technology.

Property values in these areas will likely be more resistant to any down-turn in the market than more remote sites, as investors continue to realise the benefit of strong cash flows from retailers who are prepared to pay a premium to get their products into the hands of consumers on shorter turn-arounds than their competitors.

There will be few better examples of these dynamics in action than in South Sydney, which is at the centre of a perfect e-commerce storm. Already located on the doorstep of Kingsford-Smith Airport, Australia’s busiest freight airport, and Port Botany, our second-largest container terminal, industrial property in places like Alexandria and Waterloo has long benefited from its location between these two hubs and the dense inner suburbs of Sydney. Today, this advantage has been super-charged by residential developments which have created Green Square, the densest urban area in Australia, right in the midst of these existing industrial holdings. Add in the completion of WestConnex, the Sydney Gateway project and the Port Botany Rail Duplication, and it’s not hard to comprehend that demand for logistics space in this neighbourhood is only likely to increase into the foreseeable future.

Author: James Maydew, BSc (Hons), MRICS Head of Global Listed Real Estate, Sydney, Australia

Source: AMP Capital 29 August 2019

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