
Australia’s industrial property boom may have finally reached its peak, according to Savills Australia’s recently released ‘Spotlight Industrial Shed Briefing – July 2024’ report.
The report revealed that industrial vacancy rates are climbing on the East Coast – reaching 3.4 per cent in July – while rental growth slows to a standstill across most core markets.
But according to Savills, investment activity remains robust with total investment volumes exceeding $3 billion in Q2. While reflecting a modest increase of eight per cent from Q1, it’s a whopping 168 per cent greater than its lowest quarter last year – and driven partially by Barings and REST Super’s recent $780 million acquisition from Goodman Group.
The Shed Briefing has also revealed leasing activity is at pre-pandemic levels – with 767,875 square metres of industrial space leased in Q2. This reflects a 20 per cent increase from last quarter.
“We are certainly navigating the start of a new chapter for industrial property – with vacancies creeping upwards coupled with rental growth slowing, despite high levels of investment,” said Savills’ National Head of Research, Katy Dean.
“While the continued high interest rate climate and uncertain economic outlook combine to create further challenging conditions for the sector, the outlook is positive on the back of the enduring themes related to population growth and shifting supply chains.”
While 2023 saw rental growth in some precincts peaking at nearly seven times their average, a very different trend is now unfolding, says Savills. Nationally, prime net face rents remain 62 per cent higher than they were in 2019, but the outlook for further rental growth has narrowed – especially in markets where vacancy has risen.
“Rental growth has ground to a halt in the country’s core precincts, including Melbourne West, Brisbane Southside, and Adelaide Northwest. A select few areas are now seeing rents contract. For example, prime net face rents in Sydney’s West have declined 7% quarter-on-quarter,” said Ms Dean.
However, she noted that despite this decline, Sydney West rents remain 84 per cent higher than they were five years ago in Q2 2019.
Vacancy rates have also risen across the East Coast, reaching an average of 3.4 per cent in July 2024 – up from 2.8 per cent in March, according to the Shed Briefing. Sydney’s increase in vacancy is most notable at 3.62 per cent, up from 2.2 per cent in March, while Melbourne’s vacancy has risen to 3.07 per cent, up from 2.72 per cent. Brisbane’s vacancy is relatively stable at 3.38 per cent, compared to 3.47 per cent in March.
Interestingly, Ms Dean said that leasing incentives have gradually increased since mid-2023, continuing into Q2 2024 and leading to a decline in net effective rental rates.
“If effective rents continue dwindling due to higher incentives, there may be a real adjustment to capital values, which – up until this point – has been shored up by face rental growth as yields hold. While there has been no sign of this correction in Q2, we may start to see this divergence if there is a greater spread of precincts seeing effective rents decline,” she said.
However, despite the slowdown in rental growth and uptick in vacancy rates, strong off-market activity shows that investor confidence remains robust.
Michael Wall, National Head of Industrial and Logistics at Savills said this investment underscores an embedded confidence among investors, driven by accelerating demand factors such as sustained population growth, e-commerce expansion, and enhanced supply-chain resilience.
“The shift in appetite that we’ve seen over the last 12 months from super and sovereign wealth funds reaffirms investor preference for the sector.
“Notably, rising allocations towards industrial logistics away from other asset classes not only serves as a hedge against volatile economic conditions but also positions them to capitalise on the structural changes that are happening on the back of population growth. This trend is evident as more groups begin land banking, especially in Melbourne and Sydney.
“Although rental growth in most markets is decelerating, there remains significant potential for rent reversion, with current rents averaging about 60 percent higher than they were five years ago, presenting a compelling windfall to investors looking to increase their exposure.”
Savills’ report reveals that total investment volumes reached approximately $3.1 billion in Q2, for deals with a sale price of $10 million or above. This represents a small increase of eight per cent from Q1, but a staggering 168 per cent increase from Q1 2023, its lowest quarter last year.
According to Savills, around 767,875 square metres of industrial space was leased across Australia in Q2, including pre-commitments – representing a 20 per cent increase from Q1. This is now on par with pre-pandemic leasing activity, which averaged around 700,000 square metres per quarter from 2016-2020.