Published 16 August 2007
Industrial property occupancy costs rose by nearly a third in the 3 years to 2005, CB Richard Ellis research director Zoltan Moricz told the firm’s market outlook breakfast on Wednesday.
But that’s not the whole story – profit margins leapt even more in the same period. Meanwhile, rents have fallen behind as costs of land & construction have increased.
Mr Moricz said leasing agents told him rents were reaching an affordability barrier, so he compiled research on a number of small-medium manufacturing, wholesale & transport businesses to highlight trends: “On average, occupancy costs were around 3% of company income in 1998 & 2002. In the 3 years to 2005 they have increased by nearly a third, to 3.9%
“On the face of it, occupancy costs escalated rapidly and they may well be breaching affordability barriers. However….. net profits increased from an average $125,000 in 1998 to $193,000 in 2002 & $343,000 in 2005. Just as importantly, profit margins show the same trend.”
His conclusion: Affordability per se shouldn’t be a major barrier capping rental growth. However, cyclical factors could be the cause of the recent increases in profits & profitability, and cyclical changes could adversely impact profits and therefore affordability.
Mr Moricz also looked at yields & leverage (based on analysis of mortgage rates in late 2006) and found owner-occupiers were paying about 23% more in mortgage repayments than the prevailing market rent.
Recent increases in the cost of debt had widened the gap: “Based on current interest rates & yields, the gap between market rents & mortgage repayments is approaching 40%. While there are other factors that make owner occupation more attractive than renting, the implication is that industrial occupiers can afford higher rentals.”
But that didn’t mean rents would rise. A number of other factors were also at play, Mr Moricz said:
When will historically banked land, which enables many developers to offer cheap rents, become exhausted?How tight will the occupancy market need to become before real upward pressure is brought on rents?Will there be cheaper land brought into industrial use in the urban periphery? When & how much?
“When, and by how much, rents will grow will be determined by these factors.”
Attribution: Presentation notes, story written by Bob Dey for this website.