Companies are beginning to sublease their excess warehouse space, a sign of growing confidence around the management of their inventory following the disruption of global supply chains during the pandemic. 

In Australia, industrial vacancy remains at an all-time low, under 1% in some cities, according to JLL.

Though agents describe the availability of sublease space as a trickle, not a flood, the uptick in vacancy has caught the attention of market spectators because warehouse space has been extremely tight since the pandemic when companies were holding more stock amid the disruption.

“Typically, we are seeing up to 5,000 square metre sublease spaces come onto the market, but 12 months ago, this would have been unheard of,” says Matt Lee, head of industrial and logistics occupier services in Australia, for JLL.

The industrial sector has been real estate’s golden child since the COVID-19 pandemic. Low vacancy has pushed up rents in excess of 50% in some cities, including Sydney, over the past 18 months, JLL data shows.

During the pandemic, and in the years since, retailers, manufacturers, and third-party logistics companies have sought more space than ever, with some increasing their stock holdings by 30%.

Disruption to local and international supply chains exposed the risks of the highly lean ‘just-in-time’ inventory management model and saw a shift towards the ‘just-in-case’ approach.

Now, supply chains now actively seek to spread manufacturers across geographies while reducing any single points of failure derived from transportation and distribution, according to a JLL research blog post.

“In reaction to not being able to fulfil orders, companies were taking more warehouse space than they needed. This led to overflow warehouse solution and many companies decentralising into other states,” says Richard Phillips, head of supply chain in Australia, and New Zealand for JLL.

“We are far from seeing a full reversion to pre-Covid levels, and in some cases decentralisation of stock may mean the net space required locally for some occupiers will remain.”

Record amounts of warehouse development will bring much needed supply into the market. However, in locations such as Sydney, where infrastructure and land zoning challenges persist, it is expected that demand will continue to outpace supply. 

Hope for occupiers

With sublease space now creeping into the market, there is a flicker of hope for occupiers that have been faced with no relocation options for when their leases expire, or for when their current accommodation is no longer suitable.

“We would get a call every second day from a tenant who would say to us ‘our lease is expiring in 18 months’ time, what do we do?’,” says Lee. “Moving into another building is not an option, and you can’t negotiate a favourable deal for a lease extension because the reality is, it’s a landlord’s market. It’s a very difficult time to be a tenant with a lease expiry within the next two years.”

While occupiers continue to be hampered by a lack of available space, they are trying to make negotiations work in their favour as much as possible.

“Rents won’t be coming down for the foreseeable future. And so instead of 10-year leases many tenants are signing for three years and hoping by then they can negotiate again at reduced rents when vacancy comes back into the market,” Lee says.

“There is always a risk that the tenant gets squeezed again in the medium term, but at least we know there is some supply coming.”