Global property services firm, JLL, has released its latest industrial data for the second quarter of 2024. Notably, some precincts across Australia are recording very strong quarterly face rental growth. 

2Q24 Top five precincts - Prime Net Face Rental growth

• South Sydney 5.0% q-q, 31.8% y-y
• Sydney Outer South West 7.6% q-q, 24.0% y-y
• Melbourne South East 8.8% q-q, 27.6% y-y
• Brisbane Trade Coast 5.2% q-q, 24.3% y-y
• Adelaide Inner South 3.0% q-q, 11.4% y-y

Demand rebounded in 2Q24 totalling 732,000 sqm for the June quarter following subdued activity in 1Q24 (371,490 sqm). The 2Q result was in line with 10-year average quarterly take up. 

New stock completions totalled just over 1 million sqm in 2Q24, only the second time that a quarterly total has exceeded 1 million sqm since 2007, which is only just eclipsed by the total in 2Q22 (1.05 million sqm). 

JLL’s Head of Strategic Research – Australia, Annabel McFarlane, said, “Though demand remains resilient, with strong supply, incentives are increasing from troughs recorded in 2023, and competition from sublease space is weighing on effective rental growth. 

“At precinct level, rental growth performance is varied, with demand, vacancy, sublease and supply dynamics creating differing themes.

“Established land-constrained inner precincts have largely outperformed. South Sydney, Melbourne South East, Brisbane Trade Coast and Adelaide Inner South have recorded strong rental growth. 

“Precincts where supply has accelerated such as Sydney’s Outer Central West, Melbourne’s North and West which together account 702,360 sqm (70%) of all completions nationally, have seen face rents stall and incentives increase resulting in negative effective rental growth for the quarter.

“Significant under-construction activity for the remainder of the year particularly in Sydney’s Outer Central West and Melbourne’s North precincts will put downward pressure on rental growth through the remainder of the year,” said Ms McFarlane. 

National Average Face and Effective rental growth, y-y % change since 2019

JLL’s Head of Logistics and Industrial – Australia, Peter Blade, said, “We are finding that sublease vacancy is influencing leasing negotiations in some precincts as these groups generally offer cheaper effective rental options for occupiers. Melbourne and Sydney have 225,000 sqm and 265,000 sqm of sublease space in the market, respectively. The reason that sublease space is put to market is varied and includes opportunistic strategies to access positive rental reversion, but 3PL’s are increasingly right-sizing in response to missing contracts and associated inventory reduction. Sublease is limited in Brisbane.

“We are also seeing rental growth differences emerge across different building size cohorts, leasing activity remains resilient for smaller occupiers but demand for larger facilities has slowed. This is impacting developers that adopted strategies to speculatively develop and cater for large box users that needed larger warehouses over the last three years than historical average size.

“Historically, 14,000 sqm to 16,000 sqm has been the sweet spot for demand in Sydney, Melbourne and Brisbane, but in 2020 and 2021 this increased to over 20,000 sqm. As demand for spaces larger than 20,000 sqm has shifted, lease negotiations for this building size have become increasingly favourable for the tenant.

“With the 3PL sector being the largest occupier of buildings larger than 20,000 sqm in Western Sydney, we have observed a shift in demand for space. This shift has been driven by factors such as the inability of 3PL companies to adjust contract pallet rates in a commercially viable manner due to rental increases and significant upticks in outgoings.

Additionally, the ongoing power strike has resulted in timing risks for the Western Sydney development market, causing multiple missed deadlines for energising new buildings on time.

As a result, there is a growing trend of this sector relocating to Melbourne in order to achieve cost savings. Consequently, some customers are now being presented with two rate cards, one for Sydney and one for Melbourne,” said Mr Blade.

South Sydney Industrial vs Sydney Fringe Office Net Face Effective rents since 2015 

Melbourne: A record 555,850 sqm was delivered Melbourne’s metropolitan industrial precincts in 2Q24, accounting for 55% of national supply. Most of the stock was delivered in Melbourne’s West 331,470 sqm (60%) however, just 41,480 sqm (7%) was delivered in the South East, and the remainder in the North (33%). 

Though healthy levels of precommitment were recorded in newly completed stock in Melbourne’s West 80% and North 70%, face rental growth stalled in 2Q24, incentives increased to average 25% resulting in negative effective rental growth for the quarter. 

However, low supply, consistent demand and low vacancy are driving exceptionally strong rental growth in Melbourne’s south east. Vacancy in the South East as at 2Q24 is the lowest at 1.79% of all Sydney and Melbourne precincts. South East Melbourne recorded very strong face and effective rental growth and for the quarter and was the highest of all the precincts we track nationally at 8.8% q-q. Incentives remain stable at an average of 15%.

Sydney: South Sydney industrial rents kicked again as newly completed assets reset rental levels with average prime face rents in the precinct at $419 per sqm (+5.0% q-q). Rents have doubled in three years.

With incentives edging up to 10% effective rents are at $372 per sqm (+2.4% q-q). Notably effective rents, which take into account incentives paid to secure a tenant have been higher than secondary fringe office effective rents since the beginning of the year.  Sydney fringe office secondary effective rents ($350 per sqm). 

Face rents were flat in Outer Central West in 2Q24 and incentives jumped to average 14.8%, the highest reading since March 2021 as the market adjusts to significant supply. Supply in this precinct is expected to total 887,800 sqm this year, more than triple the long term annual average. 

Brisbane: Trade Coast recorded net face rental growth 5.2% q-q, in this tightly held precinct the only assets to complete this year have been fully preleased. 

However, moderate quarterly face rental growth of 0.7% was recorded in Brisbane’s Southern precinct. Incentives are still well below historical averages for that market, incentives jumped to average 11.5% up from 8.5% and resulted in negative effective rental growth for the quarter of -3.07%.  

Adelaide, has proved to be the most resilient market, with robust rental growth in secondary assets ranging from 5.8% to 14.6% for the quarter depending on precinct, illustrating limited immediately available options for occupiers. 

Below Image: L to R: JLL’s Head of Strategic Research - (Australia) Annabel McFarlane and JLL’s Head of Industrial & Logistics - (Australia) Peter Blade.