Annabel McFarlane, Head of Strategic Research, Australia told The INDUSTRIALIST “Though incentives are increasing, rental growth continues to surprise on the upside. As indicated through the AREIT reporting season, vacancy remains very low <3% in industrial portfolios. Construction activity is picking up but more precincts are likely to be undersupplied than over supplied in 2024 providing the ingredients for robust rental growth this year. Melbourne’s south east and city fringe precincts are two of the most land constrained industrial precincts in Australia, with well below under construction activity and this is translating into strong quarterly rental growth”

Leasing activity rebounds

• Gross take-up increased 47% q-o-q to 239,100 sqm in 4Q23, slightly below the ten-year quarterly average. Despite continued demand for industrial space, leasing activity is restricted by limited availability. The South East precinct accounted for the largest portion of quarterly leasing activity, with 49% of the gross take-up.
• The Transport, Postal and Warehousing sector accounted for the largest portion of quarterly take-up in the Melbourne market, comprising 31%. This was followed by the Retail Trade sector accounting for 16%.

Supply picks up

• There was an increase in practical completions over the quarter, with 234,300 sqm of supply brought to market. This level is 56% above the ten-year quarterly average. Absorption levels were low, with 84% of this stock available at practical completion. On the back of several subdued supply quarters, the elevated supply pipeline is expected to continue into 2024.
• The West precinct accounted for the largest portion of quarterly completions for the Melbourne market, comprising 52%. This was followed by the North precinct accounting for 31% and then the South East precinct accounting for the remaining 17%.

Rent growth continues to be driven by low vacancy

• Though supply is building, below-average space availability continued to drive rent growth, but at a lower rate compared to recent quarters. Incentives have increased. Prime rents grew across all tracked precincts in the quarter, with the South East precinct recording the highest growth of 3.3% q-o-q. The South East precinct led Secondary grade rent growth, recording 3.7% q-o-q.
• The Melbourne market investment volume totalled AUD 220.5 million over the quarter. This is a transaction level 25% below the ten-year long-term average.

Outlook: Robust but slowing rent growth

• Rent growth is expected to remain robust but slow substantially in 2024. Close to 45% of the 893,100 sqm under construction in Melbourne is pre-committed with delivery in 2024. Incentives are expected to rise as uncommitted supply reaches completion over the year and occupier demand is impacted by weaker economic conditions.
• Yields are forecast to have concluded their decompression cycle and should stabilise over the short term.

Click here to read more Industrial market overviews and research:

Limited availabilities continue to drive demand and, in turn, rent growth, By Annabel McFarlane, Head of Strategic Research, Australia.