James Templeton, National Head of Industrial Logistics, Knight Frank
New research from Knight Frank has revealed the industrial leasing market remains strong, with continuing high demand from occupiers coupled with a lack of supply leading to widespread rental growth.
Vacancy rates are still at an all-time low, with only 547,748 square meters available across the Eastern Seaboard capital cities, according to Knight Frank’s Australian Industrial Review – Q4 2022.
The main culprit is a 56 per cent decrease in availability over the 2022 calendar year and an eight per cent drop in Q4 2022.
Sydney continues to have the tightest market with only 89,129 square meters of available stock, followed by Brisbane (226,916 square meters) and Melbourne (231,640 square meters).
Melbourne’s vacancy rate plummeted by 70 per cent in 2022, while Sydney and Brisbane both saw a decrease of 31 per cent and 38 per cent, respectively.
The report states that due to the persistent high demand from occupiers and extremely low vacancy rates, all capital cities in Australia are experiencing significant rental growth.
Perth was identified as having the fastest rental growth nationally, with prime rents soaring by 41 per cent year-on-year and seven per cent in Q4 2022, due to robust tenant demand and rising construction costs.
In the same vein, Sydney experienced a 12 per cent rental growth over the quarter and 29 per cent rental growth over the year.
Among the submarkets, the South West precinct saw the most robust growth at 37 per cent year-on-year.
Melbourne’s prime rents increased by 19 per cent in 2022, while Brisbane saw a 16 per cent rise and Adelaide saw a 12 per cent rise.
A recent research report released by the Property Council of Australia sounded a stark warning for all levels of government on the woefully inadequate supply of zoned industrial land across Greater Melbourne.
The Urbis-led research shows that there is currently only four years’ worth of zoned industrial land across Greater Melbourne.
Currently, prime net face rents in Sydney are at $210 per square metre, followed by Brisbane ($137/sq m), Perth ($133/sq m), and Melbourne ($126/sq m).
Knight Frank National Head of Industrial Logistics James Templeton (pictured above) said limited availability and pent-up demand had triggered unprecedented rental escalation nationally.
“There is ongoing intense competition for available industrial space, especially new stock, which has led to surging double-digit rental growth,” he said.
“Alongside face rental growth incentives have also fallen slightly, which has seen stronger growth in effective rents, particularly in precincts where rents have historically been lower, such as Sydney’s Outer West and South West and Melbourne’s West.
“In Sydney the South Sydney market is the tightest, with no vacancy recorded since Q3 2021, while the Inner West and Outer West experienced significant vacancy decline in 2022. The limited vacancy has left tenants with no choice but to negotiate or renew leases for space three to 12 months in advance.
“In Melbourne availability of good space is becoming more of an issue, with only secondary stock immediately available in the over 5,000 square metre range.
“Across the three major cities of Sydney, Melbourne and Brisbane the most active sector was transport, postal and warehousing, with logistics and retail trade operators continuing to drive tenant demand.
“We expect further rental growth in the industrial market over 2023, but it is likely to be at a slower pace closer to 10% on average, particularly as more supply is delivered and vacancy likely ticks up from its extremely low current levels towards the end of the year.”
Knight Frank Chief Economist Ben Burston said 2023 was forecast to be a record year for new developments across the East Coast with 2.5 million square metres expected to be delivered.
Mr Burston said the strength in the leasing market and widespread rental growth had offset the impact of rising rates and higher funding costs on asset values and was expected to continue doing so despite yields rising by around 75 basis points in most markets since April last year.