In 2023, the commercial real estate sector faced significant market volatility, driven by broader macroeconomic factors. This tumultuous environment resulted in asset value write-downs, particularly for sectors struggling to counterbalance yield decompression with rising rents.

While the Industrial & Logistics sector has not been immune to challenges such as higher inflation, increasing funding costs, and slowing economic growth, it does remain in a unique position as the fundamentals remain solid.

This trend is particularly evident in the Melbourne South East market, where a chronic undersupply of pipeline-zoned industrial land has led to a demand-supply imbalance. While other major metro markets grapple with softening conditions, the South East’s fundamentals remain solid, cushioned by the persistent demand that outstrips the limited supply.

According to Colliers Industrial & Logistics industry expert James Stott, the supply-demand imbalance is reflected in a note-worthy decrease in the vacancy rate, which stands at a mere 0.69% as of the second half of 2023. This low vacancy rate is a testament to the sector’s strength, strongly driven by robust fundamentals and high demand.

The occupier market has been a stronghold for the Industrial & Logistics sector, supported by record low vacancy rates, substantial rental growth, and remarkable demand levels. In 2023, the South East market witnessed a record-breaking year in terms of total volumes, with transactions surpassing the 540,000sqm mark for spaces exceeding 3,000sqm, comprising of 60 transactions. This significant year follows the momentum of a record-breaking 2022, when volumes exceeded 394,000sqm. Despite the challenging economic conditions and initial concerns, the sector flourished, with the year concluding on an unprecedented note.

The growth is further emphasised by the YoY rental growth rates, with the broader South East experiencing an 11.3% growth in net rent in 2023, building on the 20% YoY growth observed in 2022. Areas like Dandenong South, rental growth has been even more pronounced, reaching 16.89% to $140.39/sqm.

Colliers' Industrial & Logistics team played a crucial role in several noteworthy transactions during the record-breaking year in Melbourne's South East. One standout deal was the ground breaking lease at 2, 1090 Centre Road, Oakleigh South. Led by Colliers experts James Stott, Jonathan Mercuri, and Richard Wilkinson, the team secured an impressive 8,331sqm building at $150/sqm on a 5-year lease. This accomplishment is a testament to the sector's exceptional resilience.

Looking ahead at 2024, the market’s state remains a topic of interest. The anticipation of a more subdued economic climate is expected to impact volumes and growth. However, despite a potential decrease in demand, it is crucial to emphasise the supply-side fundamentals of the South East. With tight vacancy, limited land supply, and an anaemic spec pipeline, the current status quo is likely to persist. Rental growth may continue, albeit at a more subdued rate compared to the robust growth observed in the past 24 months. The South East’s Industrial & Logistics sector stands resilient, navigating challenges with a solid foundation and unique market dynamics.

By Colliers James Stott National Director Industrial & Logistics Melbourne East. 

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