Globally, a significant jump in industrial and logistics (I&L) occupier demand has occurred since 2020, led by a surge in consumer consumption and broader demographic shifts. In tandem with supply chain disruptions due to the closure and backlog of key global ports, demand has outpaced supply by a substantial margin, leading to sharp declines in vacancy rates across most markets.

In response, supply pipelines have increased globally, particularly in the United States (US).

While supply has also increased in Australia, with 2023 set to record the most amount of new supply since pre-GFC, the Australian I&L sector is unique in a global landscape due to a relatively rigid planning regime and higher levels of pre-commitment activity.

On a per capita basis, Australia will deliver a similar level of supply to the US (0.13 sqm per person in the US versus 0.12 sqm per person in Australia); however, the commitment rates in Australia are much higher which will mute impacts on the vacancy rate when compared to the US.

US deliveries hit record highs

In recent years, I&L supply in the US was outpaced by significant levels of demand, which led to a large fall in the national vacancy rate. In fact, between 2012 and 2022, new supply has only surpassed demand three times on an annual basis.

Historically, new supply in the US has been predominantly speculative. At the height of the previous industrial cycle (2002-2007), the speculative pipeline made up roughly 90% of all space under construction.

Between 2012-2022, this figure averaged 62%. For 2023, over 80% of facilities built so far have been speculative, with 2023 set to be a record year of new additions, surpassing the 47.8 million sqm record brought online in 2022 (figure 1).

Given the high volume of uncommitted stock that has entered the market, the US vacancy rate has increased from its recent low of 2.8% in early 2022 to its current 4.7% (figure 2) and is forecast to rise above 5% in 2024 (still well below the 15-year average of 6.8%).

The pace of rental growth has been tempered as a result, with average rents increasing by 12.8% in the year to Q3 2023, down from 47.8% in the year to June 2022.

In response, many have asked if the current supply pipeline in Australia will have the same impacts on vacancy and rents. To examine this, we unpack the supply composition within the Australian market and how Australia is different from the US.

Contrary to the US, 72% of supply additions until the end of 2024 are committed, including 92% in 2023 and 52% in 2024. As a result, Australia will not experience the same influx of unleased supply, ensuring vacancy rates remain tight, thereby driving further rental growth.

Australian pipeline has healthy commitment rates

Unlike the US, warehouse supply in the Australian market is demanded (pre-leased) as most larger briefs in the market have tended to go down the design and construct route.

Over the past decade, speculative supply is estimated to account for just 27% of new supply additions. For cities such as Perth and Adelaide, speculative development has historically not been a feature in the market, with new supply almost entirely stemming from pre-commitment or owner-occupier supply.

Given buoyant leasing conditions, developers have taken advantage of historically low vacancy rates, and there has been a growing desire to pursue speculative development strategies, particularly in the East Coast states, while Perth has also recorded a sharp uptick.

For 2023, approximately 45% of new supply additions will stem from speculative facilities (figure 3), while as it stands, almost 35% of facilities due for completion in 2024 are speculative, albeit this will likely increase as we progress into next year.

Contrary to the US, 72% of supply additions until the end of 2024 are committed, including 92% in 2023 and 52% in 2024. As a result, Australia will not experience the same influx of unleased supply, ensuring vacancy rates remain tight, thereby driving further rental growth.

While not all this commitment is expansionary, backfill leasing options that are vacated will be met with strong demand as current enquiry on the East Coast exceeds 2.3 million sqm, which far outpaces known backfill options.

From a vacancy perspective, even if we assume that all unleased speculative space were to become available today, the national vacancy rate would only increase to 3.3% which is below the market equilibrium of ~5.0%.

What does this mean for vacancy and rents?

Rental growth over the past two years has been unprecedented, with the national weighted prime rent index increasing by 44.2% over the period (22.0% for the past 12 months) as occupiers have had to compete with one another to secure space.

From a vacancy perspective, even if we assume that all unleased speculative space were to become available today, the national vacancy rate would only increase to 3.3% which is below the market equilibrium of ~5.0%.

At a balanced market of 5.0%, rents have tended to grow around the long-term average of 3.0%, highlighting the continued pressure on rents for the year ahead.

While strong by historical standards, enquiry levels have eased from the peaks recorded in 2021 and 2022 and stem from moderating consumer consumption as households reign in their budget given cost of living pressures.

Accordingly, rental growth is expected to cool from the levels recorded over the past two years, similar to what is occurring in the US. However, given the abovementioned high commitment levels of supply, rental growth in the Australian market is expected to outperform.

Where to from here?

Nationally, prime rental growth in the order of 10% is expected over the next 12 months and compares to the mid-single digits for the US.

With limited supply additions in inner ring markets (21% of the supply pipeline in 2024), infill markets are expected to outperform (10-12% growth over the next 12 months), supported by a continued focus of occupiers to be in markets immediately surrounding population densities given transport cost savings.

Owners of industrial and logistics will continue to push face rents in the Australian market, given the value implications.

At the same time, in some markets where there is greater competition and landlords are more motivated to lease space, upward pressure on incentives is expected.

Incentives have trended to historic lows in recent years, and there are many submarkets where they average under 10%.

This trend will likely be more pronounced in submarkets where supply is increasing; however, broadly, they are expected to average between 10-20% by the end of 2024.