Despite a slowdown in momentum from what was a very hot market, the New South Wales industrial market is still seeing plenty of activity, buoyed by ongoing significant leasing demand, combined with a lack of supply to meet this demand.

Sydney was the only city on the Eastern Seaboard to see a tightening in vacancy over Q2, according to Knight Frank research, with the city’s vacancy falling by 27% to 32,175 sqm.

Over Q2 Sydney industrial rents rose by 4%, just behind Adelaide, which led growth at 5%.

Over the 12 months to the end of Q2 Sydney rents had risen by 39%, some 12% ahead of Perth, which had the second highest growth at 27%.

Going into Q3 we have seen some softening in conditions, but to date this has been at a much lesser level than expected, with one piece of evidence being the predicted rush in sublease space failing to come to fruition.

There was a great deal of chatter on the expected surge in sublease space that was meant to flood the market in the September quarter. While some did become available - primarily in stock below 1,000 sqm - it was nowhere near enough to make an impact on vacancy levels or lead to a reduction in rents.

As interest rates have stabilised we have seen more certainty return to the market, with more positivity around the outlook for the next six to nine months, especially as the market normalises from the huge growth we experienced in recent years.

In line with that, we are still seeing significant tenant demand in the NSW industrial leasing market, particularly in the 10,000 sqm+ requirement in Sydney’s Outer West, North West and South West precincts.

The major occupier of space continues to be the transport and logistics sector, followed by online retailers.

In line with demand, rental growth has continued, albeit at a slower pace than what we experienced in the first half of the year. We expect this trend of ongoing rental growth to continue into Q1 2024.

Ongoing elevated construction costs and the delay in the delivery of materials has been a contributing factor to rental rates remaining high and sustaining these rates across the board.

Incentives are in single digits, at historical lows. They have remained low due to the chronic lack of supply, with vacancy levels lower than 0.5% across Sydney and the majority of new stock not expected to hit the market until Q3 2024.

Of this new stock, approximately 50% has already been pre-committed, primarily in the Mamre Road Precinct in Western Sydney.

What’s happening in the investment market?

In Sydney’s investment market, procurement of land has remained strong, especially above five hectares in the outer west, north west and south west regions.

We have also continued to see strong buyer demand for infill locations right through to South Sydney for the purpose of multi-level warehousing. This has pushed land values in South Sydney well above $3,500 per sqm, and appetite remains strong for this type of development, which so far has not surpassed two levels.

Across all property sectors, including industrial, the market has faced uncertainty following interest rate rises, which has led to a slowdown in transaction volumes. In the Sydney industrial market we are seeing transactions occur with vendors who have understood that the market has softened and that land values had adjusted from 12 to 18 months ago.

What’s next?

At Knight Frank we will be growing our New South Wales’ industrial team as we anticipate solid market conditions to continue.

Much of the activity this year has been off market as tenants and landlords have tested the market over 2023. These transactions have set the bar for a return for more normal conditions in the industrial market this year and moving into next year.

We expect more of the same going into 2024 in terms of the stabilisation of rents and land values, but we expect to see more stock coming to the market for sale from vendors wanting to unlock the equity in their properties and realise some capital.

By Orlando Maciel Knight Frank Partner, Head of Industrial Logistics, New South Wales