Boom ending as industrial market rebalances, says Savills report

Australia’s industrial real estate market is now adjusting following a cycle of record growth, according to leading real estate agency Savills Australia’s recently released ‘Spotlight.

The report reveals that rental growth has halted across Australia’s three largest core industrial markets – Sydney West, and Melbourne. West, and Brisbane Southside – as vacancy stabilises. 

Deal flow may also be at a turning point, with Savills’ data revealing industrial investments of over $10 million reached around $2.5B in Q3. But while this reflects buoyant appetite, transactional activity shows that investors remain committed to capitalising on structural tailwinds to secure returns, according to Savills.  

Industrial leasing activity on the East Coast is also rising in line with its pre-pandemic average, according to the report, with 842,500 square metres leased in Q3. This represents an increase of around 10% from last quarter when take-up reached around 767,875 sqm. 

“There has been a notable uptick in the leasing of spec space, representing 14% of deal volumes and nearly double what we have seen in any quarter over the last year. It reflects increased demand for higher quality buildings and a potential rebound from retailers and distributors ahead of the peak holiday shopping season,” said Savills’ National Head of Research, Katy Dean. 

Strategic Growth Recalibration as Supply-Demand Dynamics Shift

The industrial boom is drawing to a close, says Savills, with leasing fundamentals rebalancing following a three-and-a-half-year growth period that peaked in late 2023. “Signs of deceleration have been evident throughout 2024, with both rental growth and speculative construction rates gradually declining. Vacancy rates have also increased, marking a significant shift in supply and demand dynamics following record low levels in 2023,” said Ms Dean. 

Following the reset in Q2, where face rental growth slowed to a standstill in some markets and began to contract in others, Q3 is showing signs of stabilisation. Across three of the five largest core markets nationally—Sydney West, Melbourne West, and Brisbane Southside —average prime net face rents remained unchanged in Q3. 

In an interesting contrast to East Coast industrial markets, both Adelaide North-West (+2.9%) and Perth Core (+3.2%) saw small increases in Q3, with the high end pushing up average rents.

Savills say this quarter also brought some stability to average incentive levels, with most markets reporting no change. This will aid investor confidence in the near term, helping landlords to maintain competitive lease terms and preserve the reversionary value accumulated over the last three years. Nationally, on average, prime net face rents are still about 50% higher than the same period in 2021, and over 60% higher than in 2019. 

According to ‘Spotlight Industrial Shed Briefing – November 2024’, the East Coast vacancy rate rose over the last three quarters but now looks to be stabilising, reaching 3.41% in October 2024 – a small increase of 3.36% in July. Sydney’s increase in vacancy is the largest currently at 3.75%, up from 3.62% in July, while Melbourne’s vacancy has risen 3.09%, up from 3.07%. Brisbane’s vacancy is stable at 3.38%, compared to 3.47% in March. 

Ms Dean said that effective rents have faced significant pressure due to rising incentives, which have doubled in some submarkets over the last 12 months.
“This increase has led to negative net effective rental growth, especially in submarkets where net face rents have either contracted or stagnated. In Sydney’s West, net face rents adjusted downwards in Q2, and average prime incentives have risen from 7.5% in 2023 to 17.5% in 2024, resulting in a nearly 10% decline in net effective rents over the past year,” said Ms Dean.

Transactional Activity Robust as Investors Ride Structural Tailwinds to Lock in Returns Savills says that transactional activity remains robust, driven by both opportunistic and value-added transactions, signalling widespread confidence in the longer term as investors recalibrate risk and return expectations. The expected interest rate cuts next year will further boost investor sentiment, while the yield stabilisation over the past two quarters suggests that the market is nearing its cyclical low.

Recent transactions indicate improved liquidity for specific buyer groups – including opportunistic capital, syndicators, select institutions such as super and pension funds, and offshore investors, says Michael Wall, National Head of Industrial Logistics at Savills.

“There’s a strategic recalibration underway, with investors deploying capital to develop or reposition properties in high-demand and growth-oriented markets to increase their exposure to the sector and in turn, enhance returns.

“The rebound in investment volumes over the past two quarters, along with substantial capital waiting on the sidelines reflects strong confidence in the sector’s future investment performance,” says Mr Wall.

Testimony to this are recent transactions including Aware Super and Barings’ acquisition of Austrak Business Park in Melbourne for around $600 million. Meanwhile, PGIM Real Estate and Elanor Investors jointly acquired the 19-hectare Woolworths Distribution Centre site in Victoria for around $200 million, with plans to develop it into a last-mile logistics estate. 

The Spotlight Industrial Shed Briefing found that total investment reached around $2.5 billion in Q3 on deals $10 million or above – down 27% on Q2. This reflects a significant rebound in contrast to the last 12 months when investor activity was subdued. However, year-to-date investment volumes are at $8.8 billion, already 36% higher than last year’s $6.5 billion – suggesting that investors will continue to capitalise on structural tailwinds to generate returns.

“Investors are actively repositioning for returns, driven by favourable demographics and the strong demand profile in industrial and logistics, both of which are encouraging increased investment in the sector,” said Mr Wall.

Savills’ report also found that in Q3, the average individual deal size increased by approximately 6% quarter-on-quarter and 30% compared to the same period last year. “This significant growth suggests that scale investors are re-engaging with industrial. This is supported by a noticeable recovery in buy-side activity, particularly from institutional investors either directly purchasing or leveraging foreign capital to acquire properties valued at $50 million or more,” says Ms Dean.

According to Savills, average net face rents in Sydney’s industrial sector remained constant over the past two quarters. Currently, average rents are nearly 80% higher than they were three years ago, reflecting the rapid growth the sector experienced. Vacancy rose to 3.75% in October, up from 3.62% in July, while blended prime and secondary market yields are holding at 5.2% for prime and 5.7% for secondary.

Melbourne: City Fringe Sees Rents Rise as Most Precincts Hold Stable Average prime net face rents in Melbourne industrial have remained stable overall, though
they show a blended year-on-year growth of 10.2%. The City Fringe saw a rental growth of 7.3% quarter-on-quarter. The vacancy is relatively stable, moving from 3.07% in July to 3.09% in October, and market yields remain stable, holding at 5.3% for prime and 6% for secondary.

Except for the Trade Coast, which experienced a 3.6% growth quarter-on-quarter, average prime net face rents in all other Brisbane industrial precincts stabilised. However, they still reflect a blended year-on-year growth of 8.8%. The vacancy rate for existing buildings is unchanged at 3.38% in October, while average prime market yields also remain unchanged at 5.8%. 

Limited New Supply Fuels Rental Rise   

In Adelaide, average prime net face industrial rents have risen by 3.1% quarter-on-quarter, with low vacancy rates sustaining the growth cycle despite economic headwinds. A limited pipeline of new developments is restricting speculative availability, particularly in inner submarkets where vacancies are especially tight. This is also fuelling rental growth in the North and North-West submarkets. Prime market yields averaged 6% in Q2, while secondary yields held at an average of 7% over the last 12 months.

Growth Cycle Still in Full Swing

In Perth, where average prime net face rents for industrial increased 3.9% quarter-on-quarter, the rental growth cycle is still in progress – defying earlier expectations that the cycle had concluded. There has been increased upward pressure on economic rents in new buildings, due to higher construction costs and labour, which is pushing up the overall average. Prime market yields also held stable at an average of 6.2%, with secondary yields unchanged.