Industrial leasing demand and rental growth have remained high despite construction costs increasing by more than 50% over the past year. 

Colliers’ research found that construction costs were now on average $1,100 to $1,300 per sqm or higher, indicating a rise of more than 50% over the past 12 months alone, up from a range of $700 to $850 per sqm 12 months ago. 

However, industrial leasing demand reached record highs in Q2 2022, with almost 1.5 million sqm leased in the quarter for deals over 5,000 square metres.  

Almost 440,000 sqm of new supply was completed in Q2 2022, up substantially from the 330,000 sqm recorded in Q1 2022. 

Colliers said the industrial sector had been able to absorb rising construction costs to date through increased rents, low land values when purchased or yield compression. 

That said, the feasibility of select projects was being tested with yields softening and land values moderating. 

As construction prices reached their peak and were expected to ease towards the end of 2022 and into 2023, builders should have greater certainty around pricing. 

Colliers Industrial Director of Research Luke Crawford said tender pricing would become more competitive for the remainder of the year as a result of moderating construction costs, aided in part by new entrants into the industrial construction sector.  

“Nonetheless, we expect there will be a flight to quality with regards to builders and contractors and industrial developers are expected to gravitate to high-quality tier one builders who have a track record of managing price variations,” Crawford said.  

A reduction in construction costs would also mean the lead time for sourcing select products and materials would reduce, which has currently blown out from two to four weeks to six months or more in some cases. 

“An example is concrete pipes which recently experienced delays of up to 46 weeks, and subsequently led to initial bulk earthworks delays, but we are yet to see any developers shelve projects at this stage and we don’t expect many to do so,” Colliers Industrial National Director David Hall said. 

On the leasing demand side, Australia had the lowest industrial and logistics vacancy rate globally after falling to 0.8% during the first half of 2022.  

The national vacancy rate, taken from the country’s five major markets, fell from 1.3% recorded at the end of 2021, according to CBRE research.   

Looking at the investment story, national industrial property dealmaking declined 63% year-on-year to $4.1 billion in the second quarter of 2022, according to MSCI Real Assets. 

For the six months of the year, industrial deal volume fell 31% YOY to $9.9 billion.