Australia’s industrial sector is outperforming expectations as investment surges and pockets of stronger demand in Sydney and Brisbane signal a turning point, according to Savills Australia’s recently released ‘Spotlight Industrial Shed Briefing – Q4 2024’ report.
The report reveals that investment volumes soared to $3.5 billion at the end of last year, representing a year-on-year increase of 52 per cent – the highest since March 2022.
Sydney remains an industrial investment hotspot with Q4 volumes jumping an extraordinary 64 per cent from the previous quarter.
Markets with limited pipeline and low vacancy are now on a growth trajectory, according to Savills, with Western Sydney forging ahead – experiencing 5.4 per cent rental growth quarter-on-quarter.
Despite subdued pre-commitment and speculative leasing at the end of 2024, with many developers pausing spec projects due to feasibility issues, supply-demand dynamics are shifting.
In Sydney, rapid absorption of sublease supply and an increase in direct market deals signal rising demand and intensified competition for space. This resurgence, which is especially notable in Western Sydney, is spurring developers to expand their speculative projects in anticipation of continued demand into 2025.
“Q4 signals an important turning point for industrial, with the sector’s strong finish to 2024 setting a positive tone for 2025. While some deal metrics are still to be finalised, the increased investment volume marks a significant recovery from the 2023 slowdown,” said Savills’ National Head of Research, Katy Dean.
Pre-commitment and speculative leasing have been major drivers of take-up volumes since 2019, typically representing between 40 and 47 per cent of annual transactions.
However, in Q4, this fell to 21 per cent – reducing the yearly average to 31 per cent. Elevated construction costs and feasibility challenges have slowed new building starts, prompting some developers to delay speculative projects and focus on completing their existing pipeline.
This shift in leasing dynamics, coupled with fewer project completions, has helped rebalance the market and stabilise rents. Signs of rental growth are surfacing in some precincts, according to the report.
Nationally, core markets are showing varied trends. Sydney West is experiencing notable rental growth of 5.4 per cent quarter-on-quarter, becoming increasingly competitive as vacancy rates decline, while Adelaide North West saw a modest jump of 2.8 per cent quarter-on-quarter. In contrast, Melbourne West, Brisbane Southside, and Perth Core markets have all seen little movement in rental values.
“Rising demand in Sydney and Brisbane is starting to influence market dynamics, with early signs of rental growth emerging in some of the smaller precincts within these markets. Markets with limited new supply and low vacancy rates are expected to outperform in the near term,” said Ms Dean.
Effective rental growth has declined thanks to rising incentives, which have doubled in some submarkets since 2023. Despite this, most markets report either no change or only a small adjustment to average incentives.
“In pockets of Sydney and Brisbane, a rebound in net face rental growth in Q4 has mitigated some of the downturn in net effective rental levels observed throughout 2024. This resilience is expected to bolster investor confidence, enabling landlords to maintain competitive lease terms and preserve the reversionary value accumulated over the past three years,” said Ms Dean.
In Sydney, early signs indicate a positive shift in market demand, with the rapid absorption of sublease supply and a rise in direct market deals signalling heightened competition for space. Notably, vacancy in Sydney’s largest market in the West has dropped below 3.0 per cent for the first time since the start of last year.
Brisbane’s whole building vacancy (3,000 square metres+) increased to 3.82 per cent after two quarters at 3.38 per cent, due to new spec supply coming online in the Southside, Trade Coast and Northern precincts. Sydney’s whole building vacancy remained at 3.75 per cent in Q4, while Melbourne vacancy dropped marginally from 3.09 per cent to 3.07 per cent.
“Investors remain committed to increasing their exposure to the Industrial sector, and a shift in the rate cycle will keep the investment momentum running in 2025,” said Michael Wall, National Head of Industrial Logistics at Savills.
“Although the federal election and anticipated rate cuts may temper deal activity early in the year, the overall momentum is expected to persist. There is ample sidelined capital already contributing to market yield compression in Brisbane and yield stabilisation in Sydney throughout the fourth quarter.” Mr Wall said.
Total investment volumes reached approximately $3.5 billion in Q4 for deals $10 million and above – a 24 per cent increase from Q3 and the highest seen since early 2022. Annual volumes are just above $12.5 billion, significantly surpassing the $8.2 billion recorded in 2023. Institutional players are also making a strong comeback, comprising 52 per cent of deals $10 million and above in Q4 – more than double the low of nearly 20 per cent in Q2 2023.
Sydney saw the largest share of investment activity, with investment volumes reaching circa $1.7 billion (for deals $5 million and above) – a 64 per cent increase from Q3. This has brought the annual total for 2024 to around $6 billion – 40 per cent higher than in 2023 and the highest since 2021. Institutions accounted for nearly half of all acquisitions.
“Both offshore and domestic institutional investors increased acquisitions in the second half of 2024, clawing back market share from smaller private investors, who stepped up during 2023 and early 2024. Joint venture partnerships, superannuation funds and portfolio acquisitions have been more prominent, driving investment volumes,” said Mr Wall.
According to Savills, the rebound in investment over the past two quarters – and substantial amount of capital waiting on the sidelines – reflect strong confidence in industrial’s future performance as investors continue to recalibrate their risk and return expectations.