The momentum of zero vacancy, record-breaking capital investment and substantial double-digit rental growth in the industrial property markets, fuelled by the global pandemic, appears to be reaching its culmination, according to the latest Shed Briefing Report from Savills Australia.
The heightened demand for warehouses, triggered by the pandemic, is showing indications of slowing down, with businesses adopting a more prudent stance in their leasing and investment choices amid economic uncertainty, the report notes.
“The trend reflects the structural shift of businesses to focus on supply chain resilience as they aim to streamline inventory stockpiles, mitigate disruptions, and manage costs,” Katy Dean, Head of Research at Savills Australia said.
Anticipated for 2024, the growth rates in industrial property rentals are expected to approach pre-COVID levels, driven by an easing demand influenced by persistent inflation and a climate of high interest rates. Despite a dearth of new projects, a slight increase in vacancy is foreseen, according to the report, attributed to broader economic uncertainties and a deceleration in employment.
“After a sustained upward trajectory, we now see signs that industrial rental growth rates are easing. We are not seeing available space flood the market, but we are starting to see some signs that the pace of activity is gradually decelerating,” Ms Dean said.
The most recent Shed Briefing Report shows a 24 per cent decrease in investment transaction volumes compared to the same period last year.
According to Ms Dean, the path toward normalisation is unfolding in two clear phases.
The first phase is marked by cyclical challenges, including prolonged interest rate hikes, ongoing inflation, and heightened global risks. On the flip side, Australia’s robust population growth and tight labor market conditions serve as a counterbalance to these overarching economic challenges.
Michael Wall, National Head of Industrial & Logistics at Savills Australia said yet, despite the rising cost of borrowing limiting select capital inflows to industrial property, the repricing of industrial has been less severe relative to other commercial property sectors, with the resilient fundamentals positioning the sector at the forefront for investors seeking out direct real estate options for its long-term outperformance.
According to the report, average prime net face rents in Australia’s major core industrial markets – including Sydney West, Melbourne West, Brisbane Southside, Perth Core, and Adelaide’s Inner West – have surged by almost 50 per cent when compared to pre-pandemic levels.
“At its peak in Q2-2022, quarterly growth for these five core markets averaged more than 7.2 per cent. While rental growth remains elevated compared to the historical annual average of 2.7 per cent it has now slowed to just over one per cent – which is its lowest level in two years,” Ms Dean said.
“This is a clear indicator that the strong rental growth cycle is over. We expect the pace of growth on new leasing for the next 12 months to align closer to pre-pandemic trends as competitive tension for space eases while decision-making elongates.”
Mr Wall said there’s still some reversionary upside to flow through on leases due to expire.
“Rental growth has outpaced inflation and with indexation levels now forecast to remain elevated, the path to normalisation may take some time to pass through, especially given the still low vacancy rate and delays to leasing activity to 2024,” he said.
Australia’s industrial markets on the east coast are the largest nationally with Sydney West, Melbourne West and Brisbane Southside accounting for some 40 per cent of the 82 million square metres of industrial stock across 18 precincts tracked by Savills and SA1 Property.
The Report revealed that at its peak in Q2-2022, quarterly rental growth for these three core industrial markets averaged seven per cent, significantly higher than the most recent average growth rate of 1.8 per cent in Q3-2023.