The bull run enjoyed by industrial property since the pandemic, which delivered a cycle of zero vacancy, unprecedented capital investment and robust double-digit rental growth is starting to unwind.
At least that’s the conclusion from Savills Australia’s recently released Shed Briefing Report (SBR), which suggests the surge in warehousing demand is decelerating on the back of a more cautious approach to leasing and investment decision-making.
Savills’ SBR suggests investment transaction volumes have dropped by 24% compared to this time last year.
Savills believes any rebound to investment activity, notably in large-scale transactions, remains subdued due to fears the market is stuck in a continued high-interest rate funk.
Savills’ SBR also found that across Australia’s key core industrial markets (Sydney West, Melbourne West, Brisbane Southside, Perth Core and Adelaide’s Inner West) average prime net face rents are up by nearly 50% compared to pre-pandemic levels.
Pace of growth to realign with historicals
However, shorter-term data is pointing to a noteworthy inflection point. What’s convinced Savills to call time on warehousing’s bull cycle is a major pullback in rental growth, which while remaining elevated – compared to the historical annual average of 2.7% – has now slowed to just over 1% its lowest level in two years.
At its peak in Q2-2022, quarterly growth across Australia’s [five] key core industrial markets averaged more than 7.2%.
By comparison, at its peak in Q2-2022, quarterly rental growth for Australia’s three core industrial markets on the east coast, Sydney West, Melbourne West and Brisbane Southside – which account for 40% of industrial stock across 18 precincts – averaged 7%, significantly higher than the most recent average growth rate of 1.8% in Q3-2023.
Katy Dean head of research at Savills expects the pace of growth on new leasing for the next 12 months to align closer to pre-pandemic trends as competitive tension for space eases while decision-making elongates.
Repricing less severe
Despite the knock-on effect from the rising cost of borrowing on capital inflows to industrial property, Michael Wall, national head of industrial & logistics at Savills notes the repricing of industrial has been less severe relative to other commercial property sectors.
Much of this outcome, adds Wall can be attributed to the resilient fundamentals which position the sector at the forefront for investors wanting direct real estate options for its long-term outperformance.
“Rental growth has outpaced inflation and with indexation levels now forecast to remain elevated, the path to normalisation may take some time to pass through, especially given the still low vacancy rate and delays to leasing activity to 2024.”
Here’s what happened within Australia’s three core markets
Sydney West Outperforms:
- In annual terms, prime net face rents are showing growth of 19.7%.
- Among the three core markets, Sydney West has the lowest vacancy rate, of less than 1%.
- Vacancy is even lower in large industrial facilities over 10,000 square metres.
- Prime net face rents in Sydney West have experienced the steepest growth rate over the last three years of more than 82%, significantly higher than any other precinct in Australia.
Melbourne West: Modest Rental Growth
- Prime net face rents grew 1.9% quarter-on-quarter on the back of eight quarters of consecutive growth.
- Average prime net face rents have risen 40.3% over the last 12 months, up 64% since 2020.
Brisbane Southside: Strongest Quarterly Rental Growth
- Prime net face rents in Brisbane Southside showed the strongest growth rate of the three core markets in Q3-2023, up 3.5% over the quarter.
- Prime net face rents in Southside have risen 15.7% since September 2022 and 25.5% over the last three years.