_E-commerce drives growth in Melbourne’s industrial market

Growth of e-commerce

The e-commerce phenomenon is in full swing. While growth in retail sales in physical stores has stalled in recent years, global e-commerce sales are estimated to have grown by a whopping 18% in 2019 to total US$3.5 trillion, with the online share of total sales now estimated to be 22% in the UK and 10% in the United Sates. 

The global trend is echoed here in Australia where the ABS estimate that online retail turnover as a proportion of all retail turnover has doubled from 3.0% in 2015 to 6.6% in 2019, with online turnover increasing by 19.2% in 2019. At a state level, research conducted by Australia Post suggests Victoria is currently leading the way in e-commerce, with the growth in the number of online purchases highest in Victoria (19.9%, compared to the national average of 17.2%).  

The emergence of Millennials and Gen Z, improvements in return policies, the emergence of a broader range of delivery options, faster delivery times, improved tracking systems, and the rise of online marketplaces, online shopping events such as Black Friday/Cyber Monday and people shopping by smart phone are all important drivers behind the rise of e-commerce.   

COVID-19 driving accelerated change

While COVID-19 has put the brakes on economic growth, restrictions on movement will inevitably lead to an accelerated pace of transition to online, with the latest data already showing an unseasonal uptick in online sales. The ABS reports that online retail turnover contributed 11.1% of total retail turnover in April 2020, up from 5.7% in March 2019. 

The growth of e-commerce is having a significant impact on the Melbourne industrial market in a number of different ways:

1. Higher take-up

The rapid proliferation of online retail has boosted demand for industrial property in Melbourne. E-commerce related take up (from pure play online retailers and bricks and mortar retailers with an online presence) increased by 66% in 2019 to reach 191,266 sq m. Furthermore, in the first quarter of 2020 the amount of e-commerce related leasing hit 100,730 sq m, equivalent to half of what was recorded across all of 2019.  

This boosted total take-up of prime industrial space in 2019 to 560,513 sq m, 43% up on the 2018 level. And in spite of the economic headwinds presented by COVID-19, take-up of industrial space in Melbourne actually increased in the first quarter of 2020, headlined by demand driven by logistics partners such as Linfox, EFM Logistics and Quatius Logistics. 

2. Demand for larger floorplates

E-commerce related take-up skews towards larger industrial sheds. Between 2018 to 2020, 61% of all e-commerce related take up was for industrial property with an NLA of 30,000+ sq m, compared to 19% for other industrial take-up. Fashion/diversified retailers such as Klika, Catch Group and AS Colors are attracted to sheds in the 15,000 to 25,000 sq m range, whereas large format retailers such as HB Commerce and Winning Appliances tend to be on the look out for larger, 30,000 sq m+ properties.  

3. Preference for new build stock

E-commerce related take-up is also closely linked with new industrial builds, and in particular developments driven by pre-commitments. Between 2018 to 2020 a higher share of e-commerce related take-up has stemmed from pre-commitment developments than from other types of take-up such as new leases on existing industrial properties.

4. Driving demand and development in the west

Since 2017, the concentration of e-commerce related leasing activity has grown in Melbourne’s industrial west and south east. In particular in the west, as a share of all leasing activity the amount of e-commerce related leasing activity rose to 78% in 2019, and in Q1 2020 virtually all (94%) of the leasing activity in the west stemmed from e-commerce related tenants. JB Hi-Fi, Uniqlo and General Pants are but some of the major retail brands with an e-commerce presence who have recently taken up space in the west. E-commerce tenants are being attracted to the west due to the region’s comparatively low rents and close proximity to Melbourne Airport and the Port of Melbourne. 

5. Higher land values

Strong momentum in the industrial leasing market driven by e-commerce, coupled with yield compression in the investment market, has resulted in a pronounced uplift in land values. This continued in 2019, particularly in the west, where the value of 10+ hectare lots grew by over 150%. While COVID-19 has seen growth stall, longer term we expect further growth in land values in the west, given a shortage of industrial-zoned land in the area, improvements being made to road and rail infrastructure and the sustained growth of e commerce.

Outlook for further growth over the long term

Moving forward, e-commerce in Australia is set to grab an even larger slice of the retail turnover pie. While the weak economy may weigh on demand in the short term, and physical stores are now gradually re-opening, the COVID-19 crisis should accelerate the rise of e-commerce as consumers who historically didn’t shop online will embrace it as an antidote to social distancing requirements. As a consequence we expect to see demand for warehousing and logistics real estate in Melbourne continue to grow. Indeed, with bricks-and-mortar retail having already started to make way for online shopping in the years preceding COVID-19, and with plenty of room to grow in the city’s burgeoning industrial west, industrial may prove to be the property sector least affected by COVID-19. 

For further information please contact:

Finn Trembath
Associate Director, Research & Consulting
+61 403 015 211

Kanwal Singh
Research Analyst, Research & Consulting
+61 3 9604 4627