Rents in Australia’s major industrial markets of Melbourne and Sydney have remained stable over the second quarter of 2024 despite vacancy continuing to rise, according to Knight Frank’s latest research.

In Melbourne, prime net face rents were up $1 to $141/sq m over Q2, but were up 7.7% over the past 12 months.

Vacancy levels continue to rise in Melbourne, up 7.9% from Q1 2024, currently sitting at 865,916sq m at the end of Q2, as the development pipeline remains strong. with 548,188sq m of new space completed so far this year. Vacant space now stands 16% above its 10-year average.

However, take up recovered after a sluggish start to the year with 327,979sq m of warehousing leased in Q2, putting it ahead of its five-year average. In Q1 take up fell 43.5% to 195,573sq m, the lowest figure in five years, as deals took longer to complete.

In Sydney, prime net effective rents have held flat since late 2023, despite the slight edging up for incentives.

Vacancy continues to rise in Sydney’s industrial market, up 9% over the quarter to reach circa 250,000sq m in Q2, while still 46% below the historical average.

New supply is expected to reach 866,000sq m this year in Sydney, with circa 343,800sq m already delivered in H1.

Knight Frank National Head of Industrial Logistics James Templeton said Australia’s industrial market continued to normalise following several years of strong growth.

“While vacancy rates have risen, they are now at a level that is more in line with the average and they are still low in terms of historical figures,” he said.

“The fact that rents in Melbourne and Sydney have remained stable following very strong growth indicates that demand for industrial space is still strong, with the rise in vacancy rates largely attributable to the significant development pipeline rather than a drop off in demand.

“In Melbourne we have seen a significant positive change in take up, which we expected. The reduction in Q1 was due to prospective tenants taking longer to make leasing decisions due to the greater availability of options and a lack of urgency.

“Across the board tenants have more options, which is a good thing as we can better match occupiers with the right facility rather than them securing any space they can find, which leads to a more efficient use of industrial property.”

Knight Frank Partner, Research and Consulting Dr Tony McGough said with more choice, incentives had started to rise as landlords seek to attract the best tenants.

“Prime incentives are averaging 15.3% in Melbourne and 9.3% in Sydney,” he said.

“We expect vacancy to rise further this year – albeit at a moderate growth level rather than seeing a big jump, due to the new supply planned to come online.”

Dr McGough said in addition to rents, land prices and yields had also stabilised in Melbourne and Sydney’s industrial market.

Sydney prime yields were unchanged at 5.46%, while Melbourne was up just five basis points to 5.55%.

“This is a positive sign for the investment market, and we expect the increased certainty will lead to greater activity over the second half of the year,” Dr McGough said.

“In Melbourne, the quarter saw small lot – of less than 5,000sq m - and medium-sized – of 1 to 5 hectares - land values rise, by 2% to $1171/sqm and 2.4% to $925/sqm respectively. 

“For large sized lots of 10 hectares-plus, land values fell 5.8% over the quarter to $325/sq m. However, this was not due to a fall in demand, but the fact that what was available in prominent suburbs has been mostly sold, with up-and-coming development locations, where values are lower, now offering the greatest amount of land.”