Melbourne's industrial real estate market is set for significant growth over the next decade, driven primarily by robust population expansion. According to James Jorgensen, JLL's Head of Logistics and Industrial Leasing – Victoria, the city will require an additional 2 million square metres of warehouse space in the next 10 years to accommodate this growth. Melbourne's population increase is expected to outpace both Sydney and Brisbane, with Victoria projected to add around 900,000 residents during this period. This growth, coupled with the continued penetration of e-commerce, is anticipated to further boost demand for warehouse space. 

Despite these positive long-term projections, the short-term outlook presents challenges. Melbourne's industrial West, Australia's largest industrial market, is experiencing a drop in tenant demand due to decreased consumer spending, resulting in contract logistics providers having vacancy within their existing portfolios. In 2024 Leasing volumes   fell to about 50% of the regions three-year average, resulting in an oversupplied market that currently favours tenants. Softer market conditions are expected to persist into the first half of 2025, with developers reluctant to add more supply to an already saturated market. 

However, Melbourne retains strong property market fundamentals and occupancy tail winds that support its long-term prospects. These include significantly reduced occupancy costs when compared to Sydney, cheaper labour, Australia’s largest Port and a nation-leading freeway network that efficiently connects to ports and airports. These advantages should attract national distribution centres from Sydney to Melbourne in the future. 

From an economic perspective, the outlook appears promising. Real wage growth, stable employment, and controlled inflation are positive indicators. Recent data shows wages rising by 3.5% in the year to September, unemployment at just 4.1%, and household spending on discretionary goods and services increasing for the third consecutive month. The Reserve Bank's recent interest rate cut is also expected to stimulate economic activity. 

In terms of investment trends, foreign capital has been less active in the market during 2024, largely due to additional land tax surcharges and high land values. However, local superannuation funds and some owner-occupiers have maintained their market presence. A notable trend is the significant increase in demand for frozen and chilled logistics space, driven by changing consumer habits and the expansion of prepared meals sections in supermarkets. 

Looking ahead, JLL expects a gradual absorption of the current supply, followed by a return to normalised rental growth. Future speculative supply is likely to be introduced more cautiously, contrasting with the rapid expansion seen in recent years. As the market stabilises and adapts to these changing dynamics, Melbourne's industrial real estate sector appears well-positioned for long-term growth and development. 

Learn more from JLL's @James Jorgensen in our latest episode of the Perspectives podcast