Australia’s eastern seaboard experienced slowing industrial investment volumes in the first quarter of 2023, while rental growth remained resilient amid availability of stock and quality properties coming online.
New Cushman and Wakefield research found that prime net face rents in Sydney, Melbourne, and Brisbane had increased significantly due to robust tenant demand and a scarcity of leasable space, with Sydney precincts witnessing a 20% to 50% rise in rent prices between Q1 2022 and Q1 2023.
Sydney’s South West and Outer West precincts experienced the most substantial quarterly increase, with rents up 7% and 12%, respectively.
Despite a moderation in transaction volumes, which reached $553 million in Q1 2023, industrial transaction volumes remained above pre-COVID levels as investors retained excitement about the sector’s longer-term potential.
In Melbourne, leasing activity remained strong despite challenges posed by the COVID-19 pandemic.
Land and building absorption remained robust, with little vacancy in existing or speculatively built products.
Incentive levels in the institutional-grade asset class decreased across all regions, aligning with the traditionally lower levels in the South East.
Face rents in the West increased by more than 20% year on year (YoY) on average, reaching up to $130 per sqm pa for buildings under 8,000 sqm and $120 per sqm pa for buildings above 8,000 sqm.
The climate of rising interest rates and inflated construction costs introduced caution into the market, impacting sales volumes and speculative investment development stock.
Investment capital chasing industrial assets was expected to remain strong but with higher yield expectations around perceived higher risks.
Softening of yields necessitated further increases in rentals to support current values, making industrial acquisitions a case-by-case proposition.
Brisbane’s industrial and logistics market rents were the second-highest in Australia, averaging $145 per sqm pa at the end of Q1 2023.
Prime net face rents experienced a significant jump in Q3 2021, particularly in the South and West precincts, with YoY net face increases of 18% and 21%, respectively.
Growth in the Trade Coast, North, and M1 Corridor was slightly lower but still significantly above historical trends.
Rising construction costs and delays in material delivery hampered the speculative development pipeline, but high occupier demand was expected to support continued rental growth across Brisbane.
Transaction volumes in Queensland remained strong in 2022, marking the second-highest calendar year volume on record, totaling $1.2 billion.
However, total Queensland transaction volume slowed in H2 2022 and Q1 2023 as the interest rate environment continued to change.
Yields softened slightly as rising interest rates increased funding costs for leveraged investors, but those with capital actively pursued purchasing opportunities.
The strong growth in Australia’s industrial and logistics market, particularly in the eastern seaboard cities of Sydney, Melbourne, and Brisbane, reflects robust tenant demand and limited availability of leasable space.
While the current environment of rising interest rates and inflated construction costs introduces some caution, investors remain optimistic about the longer-term potential of the sector.
As speculative development pipeline challenges persist and occupier demand remains high, rental growth is expected to continue across these key Australian markets.
Global inflationary pressures that persisted throughout 2022 have pushed forward interest rate rises and tempered expectations for a rapid recovery for the Australian economy.
Although a more hawkish monetary policy stance is expected to reduce the pace of expansion in the Australian economy for 2023 and 2024, growth is forecast to remain positive in both years.
Deloitte Access Economics (DAE) is predicting that Australia’s real GDP increased at an above-trend 3.6% in 2022 before slowing to 1.7% in 2023 and 1.6% in 2024.
DAE forecast that New South Wales (NSW) gross state product (GSP) increased 4.6% in 2022, well above the annual average growth rate in the decade prior to the pandemic (2010-2019) of 2.5%.
However, GSP growth is expected to slow to 1.7% in 2023 and 1.6% in 2024.