The market for industrial and logistics space has continued to tighten, with most markets across Australia facing critical supply shortages, strengthening the rental growth outlook alongside investor appetite for acquisition and development opportunities. 

Vacancy has reached its lowest point in a decade, triggering strong rental and land value growth rates. Tenants have been quick to lock down warehouse space as competition has intensified, resulting in a 15% contraction of existing vacant space on the east coast to reach ~1.07 million sqm in April – 44% less than this time last year. Over the year, this has led to a rise in prime net face rents (blended average) of 6.6% in Sydney, 5.3% in Brisbane, 10.1 % in Melbourne, 9.4% in Perth and 3% Adelaide, with select individual precincts recording much higher growth rates. With low supply adding to competition, rental growth will continue through 2022. 

Ben Burston, Chief Economist at Knight Frank Australia, said: “Annual take-up of space (including pre-commitments) is running at about 20% above its five-year average, as businesses continue to build resilience into their supply chains. However, development completions are working to support the demand, with a record high of 2.7 million sqm planned for 2022. Speculative completions will reach a new high across the year too, with ~956,000sqm planned for the east coast, representing the largest volume of speculative projects since the series began, with Brisbane and Melbourne comprising 88% of this stock.” 

Investor demand for industrial assets continues at scale, with an estimate of ~$3.7 billion for Q1 2022, after transaction volumes topped $19 billion in 2021 – by far the highest on record. Investors are increasingly targeting safe-haven markets such as Australia, with the share of cross border investment rising from 46% in 2021 to 67% in Q1 2022. Sydney super prime yields compressed 25bps in QQ1 and are now in line with Melbourne at 3.5%, Perth and Adelaide yields compressed a further 25bps to 4.25%, while Brisbane compressed 5bps to average 4.10% in Q1. The strength of demand has seen yields compress upwards at 80bps on average over the last 12 months, but the pace of compression has slowed in recent months. 

Mr. Burston continued: “The sustained high level of investment volumes shows that investor appetite for the sector remains firmly in place, with the number of properties exchanged in Q1 around 60% above the first quarter trend seen in the last two years. Cross-border capital  continues to be a key driver of the market and with travel returning, we expect to see pent-up demand from buyers who have been unable to visit over the past two years. Rising interest rates are clearly a consideration for many investors, but with rents growing rapidly buyers continue to seek opportunity in infill locations in Sydney and Melbourne and in higher yielding markets like Adelaide and Perth.”

Sydney

In Sydney, vacancy has declined a further 20% and is now at a record low – a 75% decline year-onyear, driving strong growth in rents in the Outer West and South West quarter-on-quarter, with 2.1% and 3.8% respectively. On a blended basis, prime net face rents are up 1% Q/Q, with incentives averaging 12.5%, resulting in net effective rental growth of 1.6%. Year-on-year, average prime net face rents have risen 6.6%, well above yearly growth rates of the past decade. The appetite to scale through development is driving up land values for 1-5ha lots in Western Sydney by 20%, with only 38,984sqm available between the Outer West and South West.

Take up in Q1 totalled 173,808sqm, with transport/logistics and retail trade operators accounting for 77% of activity. A record completion year is anticipated for 2022, with over 712,000sqm of new stock set to be delivered. Over 95% of the development activity is in the Outer West and South West precincts.

Melbourne

In Melbourne, new development remains elevated, with ~1.35 million sqm of new supply forecast to be delivered in 2022. More than half of this is expected in the West (57%) and almost 31% will be in the South East. Pre-commitment activity and take-up on spec builds is dominating leasing volumes in the first part of the year, accounting for nearly 60% of leasing deal volumes. In aggregate, the value of <5,000 sqm lots have risen by 14.5% quarter-on-quarter.

Leasing volumes are sitting at around 425,000 sqm after the first quarter, and follow a record 12 month period in Melbourne where more than two million square metres of industrial space was leased. The volume of vacant space declined 19% quarter-on-quarter to measure 632,878 sqm overall. On a blended basis, prime net face rents are up 4.7% quarter-on-quarter, underpinned by a faster rate of growth in the north and east, where rents grew 7.2% on average over the quarter. In year-on-year terms, average prime net face rents have risen 10.1%.

Brisbane

In Brisbane, vacant space has fallen a further 5% in Q1 to be 43% lower than a year ago. Land value growth continues to accelerate accelerated, with prices of 1-5ha sites now 35% above the levels of a year ago, with all precincts recording strong growth. With only 337,708 sqm of vacant space available, options for tenants have considerably narrowed in the past 18 months. Average prime face rents increased by 5.3% year-on-year to $120/sqm net, average incentives have ticked down across existing stock to 15.5%.

Leasing take-up in Q1 was in line with the previous three quarters with 236,479 sqm of take-up across existing, speculative and pre-commitment assets. The exceptional acceleration of tenant demand over the past four quarters has taken the rolling 12 month total to just under a million square metres, a record level of take-up. On an annual basis the South remains the strongest with 30% of the market with sustained demand.

Adelaide

In Adelaide, land constraints amid a sustained upswing in demand levels is driving up land value and rental growth rates in the Outer South, with 1-5ha lots rising 16.1% quarter-on-quarter and prime net rents rising 6.7%. In aggregate, the value of <5,000sqm lots have risen by 25.8% year-on-year, and 1-5ha lots are up 54.7% year-on-year. The sub-1,000sqm market has continued to receive strong enquiry to lease, with recent take-up trends, contributing to low vacancy rates in inner west and inner southern precincts.

Perth

In Perth, the blended rate for 1-5ha lots is up 8.8% over the quarter and average prime net face rents are up 5.1% quarter-on-quarter, as the scarcity of land for development and sustained high tenant demand increases the competition for product. Land values started to rise in late 2021, and there are further signs of this continuing in Q1. In year-onyear terms the blended rate for small lots has risen 9.9% and 1-5ha lots are up 8.8%. Further growth is expected in land values in the second half of the year, following an uptick in land sales.

Outlook

Mr. Burston said: “The long-awaited rebalancing of spending back to services instead of goods is now occurring but demand for household goods and clothing still remains very high and will continue to support demand for industrial space. Households are responding to conflicting forces, with robust demand supported by a buoyant labour market and high levels of savings, but rising inflation is starting to weigh on sentiment. The global experience points to the risk that this could become a more substantial headwind for households in the coming months and slow the pace of spending and hence economic growth in the second half of the year.

“Rising bond yields are being reflected in the rising funding costs for investors in industrial property and will act to slow the rapid pace of value growth, especially in markets not benefitting from strong rental growth. With decreasing vacancy across the board, rising land values, and increasing crossborder investment, we can expect this sector to remain a competitive one across the remainder of 2022 at least.” 

Australian Industrial Review