The industrial sector is often seen as a development heavy division of the commercial real estate market. Whilst this is true in many cases, a mature, standing investment environment also exists and can happily co-exist, as is the case in Melbourne. 

A major milestone in Melbourne’s industrial market will be hit in 2025. The Southeast, which has historically been the largest provider of industrial space in Melbourne, will lose its crown to the West. This will highlight the shift in the historical positioning of Melbourne’s industrial base to the West and North. 

Whilst the West and North have expanded rapidly, the very mature East is built out and with little available land it cannot expand. The Outer Southeast is still expanding, but the Inner Southeast faces the same issue as the Eastern precinct. Consequently, in the last 10 years total stock in the West has grown by 60%, with the North not far behind. The East has barely added any space and the Southeast is somewhere in between.

One of the consequences of this is that there is much greater instability in the rapidly growing markets. Vacancy rates are both higher on average and more volatile. Developments in the Southeast and particularly the few in the East are much more likely to be precommitted, for example. However, during the recent boom years, the vacancy rate dropped most in the West as new tenants flocked to where they knew there would be space. 

The different precincts highlight the contrasting investment styles on offer. The Eastern precinct offers solid standing investments underpinned by tight supply. Rental growth expectations are generally higher in the constrained East, often based around lease renewals of established tenants. Hence, whilst we are expecting rental growth of 2 to 4% on average in Melbourne industrial in 2025, as the markets are experiencing a period of slower growth, we are expecting to see 5 to 6% in the East and 0 to 2% in the West. Similarly, incentives will be under more pressure in the West than the East/Inner Southeast.

Alternatively, the West and North in particular, offer the potential of development gain and more flexibility on build detail and ability to respond to new tenant demand. For example, a greater potential to build data centres, flexible use of land banks for hard stands, and the like. These precinctswill offer more appeal to new arrivals to the market and thus their tenants will represent developing and growing sectors of the economy. So dependent on where you are investing in Melbourne industrial, it offers differing strategies to match your risk appetite and investment objectives.

Knight Frank’s Horizon report can be found here: Horizon Report 2025 | Knight Frank

By Knight Frank Head of Research & Consulting Victoria Dr Tony McGough.