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Welcome to another edition of Fast Five – our series where we ask some of the most influential and exceptional business leaders five questions to get a behind-the-scenes look at some of Australia’s most dynamic businesses.

In this edition we spoke to James Templeton, Managing Director, Victoria and National Head of Industrial Logistics.

James joined Knight Frank in 2001 and has more than 20 year’s expert knowledge of Melbourne and Australia’s industrial markets including leasing, sales, corporate relocations, pre-leasing, design and construct, land and investment sales.

1. The housing crisis is one of the most pertinent domestic issues of our time. What does Knight Frank see as necessary in easing current shortages?

One of the key solutions to easing the housing shortage is to increase supply, and one of the ways to do that is to encourage more build-to-rent (BTR) developments.

BTR developments are needed to facilitate faster growth in rental supply beyond the sole reliance on the existing build-to-sell model, with mum and dad investors providing housing.

The BTR sector is rapidly expanding in Australia, with Knight Frank’s recently released Breaking the Shackles – the rise of BTR report forecasting it will see around 55,000 dedicated units completed by 2030 based on the current burgeoning pipeline of developments.

The research found that among the major cities, Melbourne was leading the way for BTR developments, with 4,920 apartments under construction and another 8,250 approved. Inner fringe locations in Melbourne, Brisbane and Sydney are natural candidates for the first wave of schemes, given their offer of amenity, close proximity to CBDs and a high proportion of potential tenants.

However, over time we expect to see a broadening of developer interest to encompass middle-ring suburbs with high levels of amenity and connectivity, with developments becoming more prolific in other states around Australia.

2. The commercial property sector was impacted by COVID and changing work habits. What ongoing trends have you observed in this space?

We have obviously seen a rise in working from home following COVID, but moving forward the dominant trend for workplace strategy seems to be a hybrid approach, with employees spending time in the office and at home.

Knight Frank’s latest (Y)OURSPACE report found 63 per cent of Australian corporates surveyed envisioned they would have a hybrid workstyle in three years, while 24 per cent stated that they would have an office-first approach and only 6 per cent said their workstyle would be predominantly remote.

These results demonstrate that despite a more complex workplace landscape post COVID, it’s clear Australian corporates still perceive that offices have a critical role to play.

The survey also found that more Australian businesses indicated they would upsize or maintain the same space (57 per cent) than downsize (45 per cent) over the next three years.

To entice employees back into the physical office, businesses are looking for attractive space to occupy in terms of the quality of accommodation, precinct amenity and ESG. In line with this we have seen a ‘flight to quality’ trend take hold across Australia, with occupier demand the strongest for premium office assets, and we expect this to continue for the foreseeable future.

To attract tenants, owners of older and secondary assets are – and will increasingly have to - refurbish and reposition their buildings.

3. In addition to being Knight Frank’s Managing Director in Victoria, you are also the consultancy’s National Head of Industrial Logistics. The industrial sector has been one of the strongest performing in recent years. How is it performing now?

Over the past few years, we saw a boom in the industrial property market due to the huge growth in online retailing during COVID. Surging occupier demand led to a chronic lack of supply across Australia, and with record lows in vacancy we saw huge growth in rents and land rates.

This year, however, we have seen the industrial market normalise, with a change in the balance between demand and supply seeing vacant space tick up.

Demand has cooled a a little as consumer spending has slowed with the higher cost of living, and supply chain improvements have led to a reduced need to hold significant stock levels.

More industrial supply has also come online, with a record circa 2.5 million square metres slated for delivery across the Eastern Seaboard cities this year.

We expect the more stable conditions in the industrial market to continue for the next six to 12 months, and the longer-term outlook for Australia’s industrial market is optimistic. While there is some economic uncertainty now, if interest rates start to fall next year as predicted, demand will likely rebound, which would see a return to stronger conditions. It’s also possible that the development pipeline may be put on pause until demand catches up again.

Meanwhile, this period will offer up some good opportunities for occupiers, with more opportunity for tenants to have greater choice of stock and rent relief.

4. What other industry trends are currently prominent? For example, have tourism and hospitality rebounded, and have certain other industry assets gained prominence?

The traditional asset classes of office, industrial and retail will always be popular with investors, but in recent years we have seen investors seek to diversify beyond these sectors into what we term ‘alternative’ sectors.

Demand for alternatives, which includes build-to-rent, healthcare and life sciences, student accommodation and data centres, has started to gather momentum to such a degree that Knight Frank established a dedicated division within its Capital Markets business last year to better service clients in the sector.

Investor demand is only set to strengthen moving forward in these sectors as occupier demand in these asset classes grows, providing owners with stable income streams in the current economic environment where there is ongoing uncertainty around inflation and interest rates.

As an example of the demand for alternatives, in the healthcare sector, which covers a broad range of assets including retirement living, aged care, medical centres, hospitals and specialist facilities, we recently saw the Epping Private Hospital and Medical Centre in Melbourne sell for circa $80 million, in what was Australia’s largest single healthcare real estate transaction this year to date.

Knight Frank’s Sam Biggins and Trent Preece, who ran the sale campaign, experienced significant buyer interest from recognised healthcare investors, as well as several groups seeking to deploy capital into the Australian healthcare sector for the first time. Investment fundamentals of this sector include the ‘stickiness’ of tenants, Australia’s ageing demographic and strong private and public sector support for the progression of our healthcare and biomed industries.

5. Is ESG of growing importance in the market? Are businesses and real estate investors much more conscious of their carbon footprint, and the carbon footprint of their assets?

ESG is absolutely becoming a bigger focus for occupiers and landlords around Australia. New mandatory sustainability reporting requirements being rolled out nationwide will see it come to the forefront even more. The changes mean businesses will have to provide hard, audit-ready data about what their emissions are in annual reports, which will be a huge change for the industry. This mandatory sustainability reporting will be phased in over time, with the first group of businesses set to provide reports for the 2024-25 financial year.

In Australia, ESG has become of increasing importance for buyers (particularly global investment groups) and tenants seeking higher quality assets, which means it is becoming more important to commercial property landlords as it impacts the value and vacancy of a building. To maintain or improve the value of their assets and attract tenants, reduce vacancy and get the best returns, landlords must have good green ratings for their buildings, or implement changes to improve the green rating.

We can’t say that we can see a premium paid for ESG yet by either buyers or tenants, but certainly investors and tenants will choose the more sustainable property if they are given a choice of more than one asset, so it makes good financial sense for landlords to focus on it.