Market fundamentals in Adelaide’s industrial market are strong, with ongoing occupier demand and a lack of supply continuing to drive growth.

Knight Frank’s Australian Industrial Review Q2 2023 found Adelaide had the highest quarterly prime rental growth of 5%, with the pace of industrial rental growth slowing over the quarter in all markets around Australia except Adelaide. Secondary net face rents in Adelaide also saw a rise of 5.12% over the quarter.

Rental growth in Adelaide’s industrial market has been consistent, with increases recorded over the past seven consecutive quarters. Net face rental growth in the six months to October now sits at 7.06% for prime stock and 6.98% for secondary stock.

A combination of factors is responsible for the strong rental growth being recorded in Adelaide, including the fact that the city was coming off a lower base with overall occupancy costs having been stagnant for some time until the pandemic. There is also a short supply of vacant existing options, with land supply also restrained.

Persistent increases in construction costs and supply chain challenges have hindered supply, leading to a supply-demand gap that has driven up rental rates for existing stock. Occupier demand also continues to be strong from both local and interstate users.

South Australia is increasingly being seen as a great place to do business, with defence and mining remaining strong industries underpinning the economy. We are seeing interstate industrial occupiers take up space in Adelaide as part of expansion plans to complete their national coverage. The ability to service Victoria and Western Australia from South Australia is a drawcard, as is the fact that there is no stamp duty on commercial transactions.

However, in the majority of sales we have seen in recent months – which are currently limited – the buyers are locals. Local owner occupiers are the most active as a way of controlling occupancy costs, with further rental growth being forecast. Investors are currently sitting more on the sidelines, considering the cost of debt and waiting to see where interest rates will end up, as well as pricing.

The majority of the limited sales we have seen recently have been off-market, which are opportunities coming about due to agents matching the right capital to the right asset at the right time. In every market cycle uncertainty around funding and pricing always results in a lull in activity, but I expect to see transactions increase in the short to medium term as purchasers and vendors get comfortable around the new norms.

Looking to the future, it’s hard to predict where rental growth will go from here, but with an ongoing demand-supply gap for at least the next year, we believe the market will continue to be solid.

Nearly 170,000 sqm of supply is due for delivery in 2025, but I expect a large portion of this will go to pent-up demand, and given the market has a large percentage of older stock, a flight to quality will also occur.

The northern precincts of Adelaide will be where a lot of market activity occurs, with 80% of developments slated for completion in 2025 in the Outer North, compared to 9.9% in the Inner and Outer South precincts.

The Outer North’s allure for development is primarily driven by its accessibility and cost effectiveness land, bolstered by the north/south corridor.

There have been some major infrastructure projects that have been completed leading to the unlocking of northern land such as the Northern Connector, North South Motorway, Northern Expressway and the Port River Expressway.

Other recent projects are the Torrens to Darlington upgrade and further South Road expansion.

Knight Frank research found that in addition to rental growth, industrial land values were also rising in Adelaide, with all precincts experiencing growth over Q2 2023.

Values of small allotments (2,000 sqm to 5,000 sqm) grew by 5.6 per cent in the quarter, while medium (1-5 ha) sized allotments rose by 4.81% on average.

The Inner North (+7%) and Inner South (+6.52%) experienced the largest quarterly rise for small allotments, with the Outer South (+8.33%) and Inner South (+6.25%) precincts leading growth for medium sized allotments.

While growth in Adelaide rents has meant they are comparable to Perth and some parts of the east coast, land overall is comparably cheaper in South Australia, which will continue to be a drawcard for buyers, with further growth expected.

By David Ludlow - Director, Head of Industrial Logistics, South Australia

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