Vacancy in Australia’s industrial market is likely to rise further in 2025 but rental growth is expected to continue albeit with a deepening divergence in performance depending on location, according to Knight Frank’s outlook report, Australian Horizon 2025.
The research found industrial prime net rental growth continued through 2024 led by the smaller markets of Adelaide, which saw 12 per cent growth over the 12 months to the end of Q3, Perth (seven per cent) and Brisbane (seven per cent).
Knight Frank National Head of Industrial James Templeton said within Australia’s larger industrial markets there were still precincts that are seeing strong rental growth but there was greater variation emerging between the precincts depending on the available supply and the level of competition for tenants.
The report found there was expected to be more divergence in rental performance between the markets more impacted by higher supply levels, such as Sydney’s Outer West and West Melbourne, and less impacted markets such as South Sydney and East Melbourne
“In Melbourne growth is strongest in the established East and South East precincts where there is less supply able to be delivered, while in Sydney the growth continues to be led by the tightly-held South Sydney market,” he said.
“This localisation of rental performance is expected to continue into 2025 and potentially deepen for precincts with similar product becoming available at similar timeframes.
“Market disruption from sublease and contraction space will also have an impact on rents and occupancy, diverting demand into shorter term spaces, but this will not be universal across the cities or sub-markets.”
Vacancy will rise further in 2025 driven by rising supply
Knight Frank’s Australian Horizon 2025 report found vacancy was likely to rise further into 2025, driven more by rising supply than weaker demand.
Leasing activity has gradually moderated as tenant urgency has returned to more normal levels and across the East Coast, rolling annual leasing take-up is sitting at 2.75 million square metres to the end of Q3 2024, almost 20 per cent below the peak of 3.42 million square metres recorded through mid-2021.
Take up remains higher than 2020 levels and 13 per cent above the 10-year average. Demand is still robust for smaller units of space, particularly in infill locations, but the strength of demand for large units of space, particularly 10,000+ square metres, has moderated with tenants taking a more measured approach.
“As we move into 2025, improving import volumes arising from a pick up in economic growth and retail spending point to tenant demand stabilising in 2025,” said Knight Frank Partner, Research and Consulting Jennelle Wilson.
The report found 2024 had been a record year for East Coast industrial completions, with just under 3 million square metres (of 5,000sq m-plus projects) expected to be delivered by the end of year.
Looking ahead total new supply for 2025 is expected to be 8 per cent lower at 2.7 million square metres.
“With construction of 800,000 square metres already underway for 2025 completion, the year will again start strongly, however the release of capital for speculative developments is expected to moderate as capital constraints take a toll on development activity,” said Ms Wilson.
“We are already seeing this with planned schemes for being pushed out to 2026 in response to shifting market conditions.”
Capital market recovery will be led by Sydney industrial
Knight Frank’s Australian Horizon 2025 report indicates that Sydney industrial property will be the first to return to capital growth as the market recovery takes place heading into 2025.
As the capital market returns to growth next year, core assets in Sydney are expected to lead the way, and within Sydney the industrial sector is likely to be the quickest to return to growth followed by offices.
Industrial asset values have largely been resilient over the past two years due to strong rental growth, according to the report. Even as supply levels rise, most investors retain confidence in the long-term growth outlook and many are still seeking to deploy additional capital into the sector.
Industrial land market continues to defy expectations
“Industrial land values have held up despite rising construction costs and pressure on asset values, and the scarcity of readily developable land means this is likely to continue in 2025, even though the development market is softening,” said Mr Templeton.
“Strong owner occupier demand, appetite for small land parcels from private investors plus institutional owners in for the long haul have combined to keep resale values robust, while there have been very few distressed sales of industrial land,” he said.
“As we have seen in Western Sydney over the past four years, the existence of industrially zoned land is only part of the delivery and value equation.
“Without essential services the ability to capture tenant demand remains elusive. This is particularly the case as greater tenant scrutiny and conservatism comes in tandem with new pre-commitment decisions.
“As such, zoned and serviced land values are expected to continue to hold firm and potentially return to growth in 2025 with developers looking through the current slowing in development and maintaining their long-term appetite for the sector.
“We expect Brisbane and Adelaide to see the strongest growth in land values next year.”
The rise of hardstand investment
Hardstand, or Industrial Outdoor Storage (IOS) is experiencing rising investor demand.
This is due to several factors including the shift to just-in-case inventory and supply chain resilience, growing last-mile delivery fleet parking (and EV charging) requirements, recycling and waste management facilities, staging and storage for major construction and infrastructure projects, vehicle and heavy equipment sales/rental and even the increasingly ubiquitous pickle ball courts all competing for similar sites.
The construction surge of the past two to three years has also absorbed a number of hardstand sites, leading to greater competition for this type of space and a change from casual or handshake agreements to more formal and longer leases to secure tenure by occupiers.
“IOS has traditionally been a back-up plan while a site is being prepared for development, however they are now becoming more sophisticated as demand rises,” said Mr Templeton.
“As the Australian investment market moves through the next stage of maturity, with strong offshore ownership now in place, IOS will continue to appeal to value-add investors with relatively high ongoing income yield (relative to investment) and greater institutional ownership over larger, potentially multi-user sites as they tap into economies of scale rather than fragmented ownership.
“Investors will see the exit strategy to take advantage of increasing land values and changing zoning to release the land value in a 5 to 10-year timeframe.”