Investment liquidity returns to Australia’s industrial property market as leasing market moderates

6 June 2024

Investment liquidity is returning to Australia’s industrial property market as the leasing market moderates, according to the latest research from Knight Frank.

Knight Frank’s Australian Industrial Review Q1 2024 found vacancy in the country’s industrial market was back to early 2021 levels from the recent extreme lows, but despite this, industrial remains the most highly sought stabilised asset class in Australia.

Vacancy doubled across the Eastern Seaboard from Q4 2023 to Q1 2024 to reach 1.49 million square metres, returning to a more normalised level at just 9% below the 10-year average.

Each city saw an increase in vacancy, with Melbourne (+454,513sqm) ahead of Brisbane (+153,906sqm) and Sydney (+151,703sqm).

This increase was mostly due to prime availability lifting from 439,091sqm in Q4 to 1,017,274sqm in Q1 – a 2.3 times increase.

Knight Frank Chief Economist Ben Burston said strong supply additions and easing demand had reset vacancy across the East Coast, increasing options for tenants.

“Over Q1 422,000sq m of supply was completed, and supply for 2024 appears on track to reach 2.9 million square metres, exceeding the record level of 2023, at 2.6 million,” he said.

“Meanwhile, leasing take up was 38 per cent lower in Q1 at 507,000sqm, the lowest since October 2020.

“Q1 leasing take-up was stable quarter on quarter in Brisbane, where it was up by 6.2%, but dropped by 43% in Melbourne and 60% in Sydney, largely due to the lack of precommitment deals.

“Annual take-up across the East Coast was 2.8 million square metres to the end of Q1, still 24% above the 10-year average but a slowdown compared to the recent past reflecting a scaling back of expansionary intent after the recent efficiency-driven surge in demand.”

Knight Frank National Head of Industrial Logistics James Templeton said that despite the easing in the leasing market, industrial property remained the most highly sought stabilised asset class in Australia.

Knight Frank’s Australian Industrial Review Q1 2024 found that the 2024 ANREV survey of investor intentions showed that 93% of investors into the APAC region would be targeting industrial, ahead of BTR.

“Investor sentiment remains weaker for both office and discretionary retail assets, leaving industrial one of the few Australian asset classes with deep availability of stabilised assets,” he said.

“While significant capital is entering Australia for the living sector, much of this is for development, with few stabilised living sector assets available. This will continue to funnel funds towards the industrial sector.

“While investment volumes in Australia’s industrial market were low in Q1 at $1.05 billion, with Sydney noticeably quiet as stubborn inflation continues to impact sentiment on the speed of monetary policy easing, Q2 began strongly and has already exceeded the Q1 level,” said Mr. Templeton.

“This confirms the expected lift in liquidity and stability in yields, and has provided confidence that institutional funds are returning to the industrial market.

“Rental growth has slowed as anticipated but rents are at least stable if not growing, and the drive for efficiency and ESG standards will continue to support above trend demand for new space.”

The Knight Frank research found rents were stable in Q1 in Sydney and Brisbane, but saw further growth in Melbourne where growth of 5%+ across three precincts pushed Melbourne to the highest annual growth rate of 9.2%.

This is just ahead of Adelaide (8.9% y/y) which surged strongly through mid-2023 and Sydney (7.7%). Brisbane was next at 6.2%, followed by Perth at 4.7%.