“Since 2008, rental prices in the industrial and logistics sectors had remained relatively flat. However, the past 18 months have seen a significant surge of 30-40%, causing tenants to struggle with these rapid increases,” says Kyle Hyam, Associate Director at Galetti Corporate Real Estate Advisory.

This dramatic change is driven by a combination of increased building costs, market influences, higher quality demands from tenants and vacancy rates.

1. Increased Building Costs: The costs of essential construction materials such as steel, concrete, and bricks have escalated dramatically. This surge in building costs has pushed rental prices for new developments from roughly R70/sqm net to R95/sqm net. This increase is not limited to new builds but has created a ripple effect across the market, driving up rental prices for existing properties as well.

2. Market Influence: The high cost of new builds has set a new benchmark in the market.

“A perfect example of  the ‘rising tide lifts all ships’ phenomenon. As construction costs rise, so do rental prices across the board, affecting both new and existing industrial spaces.” – Dean Wiid, Associate director at Galetti Corporate Real Estate Advisory.

3. Higher Quality Demands: Tenants are increasingly seeking higher-quality warehouses, driven by various factors including stricter insurance requirements. Insurers now often demand ASIB or SANS certified warehouses equipped with advanced fire suppression systems, which are typically found in built-to-spec or newer facilities. This trend has spiked the demand for premium and A-grade warehousing.

4. Vacancy Rates: Vacancies in listed fund portfolios as well as private portfolios have plummeted. There has been a large take up of space over the last 18 months and with simple supply demand dynamics, major upward pressure has been placed on rental prices.

Market Trends and Data Insights

Rode’s Report on the SA Property Market provides further insights into these trends. The report highlights that low industrial stock continues to boost rentals. Specifically, nominal gross market rentals for industrial space of 500 sqm grew by 6.1% year-on-year in the second quarter of 2024, up from 4.8% in the first quarter. Rentals for 1,000 sqm industrial spaces grew at a similar rate of 6.2%. Regionally, all major areas showed strong nominal market rental growth and low vacancies.

Strategic Insights for Tenants and Investors

Given these market dynamics, it’s crucial for tenants and investors to adapt their strategies:

1. Proactive Lease Management: Tenants should engage in proactive lease negotiations to lock in favorable terms before prices climb further. Understanding the trends and anticipating future cost increases can provide a strategic advantage.
2. Investing in Quality: Investing in higher-quality, ASIB or SANS certified properties can not only meet insurance requirements but also provide better long-term value. These properties are likely to remain in high demand, ensuring consistent occupancy and rental income.
3. Strategic Location Selection: Choosing locations with robust growth potential, such as Central Witwatersrand and the East Rand, can yield significant returns. These areas are experiencing the fastest rental growth and are likely to continue benefiting from low vacancy rates and strong demand.

Our Approach to the Next Quarter

At Galetti Corporate Real Estate, we understand the challenges faced by tenants in the logistics sector due to rising rental costs and quality demands. Our comprehensive services are designed to help you navigate these changes effectively. We conduct detailed portfolio audits to optimize your current property use and costs, develop strategic plans tailored to your future needs, and execute these strategies to ensure you secure the best possible properties at favorable terms. Our ongoing market commentary and benchmarking reports keep you informed and aligned with the latest trends, allowing you to make proactive and informed decisions.

The Future Outlook

The logistics and industrial sectors are poised for continued growth, driven by rising building costs and increasing quality demands.

As Kyle Hyam aptly puts it,

“The past 18 months have reshaped the market, setting new standards and expectations for rental prices and property quality.”

Tenants and investors who adapt to these changes and strategically position themselves will be best equipped to navigate the evolving landscape of commercial real estate.

For more insights and personalized property solutions, contact Galetti today. Let’s craft your property strategy together.

References: Rode’s Report on the SA Property Market, 2024:2