Australia’s industrial leasing market has gone from strength to strength, with ongoing high demand from industrial occupiers amidst a lack of supply driving widespread rental growth.  

New Knight Frank research found that vacancy rates were still at record low levels, with 547,748 sqm available across the Eastern Seaboard capital cities. 

This followed a 56% drop in availability over the 2022 calendar year and an 8% fall over Q4 2022. Sydney remained the tightest market with 89,1292 sqm of available stock, followed by Brisbane with 226,916 sqm and Melbourne with 231,640 sqm.  

Knight Frank National Head of Industrial Logistics James Templeton said limited availability and pent-up demand had triggered unprecedented rental escalation nationally.    

“There is ongoing intense competition for available industrial space, especially new stock, which has led to surging double-digit rental growth,” he said.    

Vacancy in Melbourne fell by 70% in 2022, while Sydney fell by 31% in 2022 and Brisbane vacancy fell by 38%. 

As a result of record low vacancy levels and sustained occupier demand, significant rental growth continued to be recorded across all capital cities. 

Perth experienced the fastest pace of rental growth nationally, with prime rents up by 41% year-on-year and 7% over Q4 2022, as the market responded to strong tenant demand and rising construction costs.   

Sydney followed suit with 12% growth over the quarter and 29% growth over the year, with the South West precinct seeing the strongest growth of the submarkets at 37% year-on-year.   

Meanwhile, Melbourne prime rents rose by 19% over 2022, while Brisbane saw a 16% rise and Adelaide saw a 12% rise.  

Prime net face rents in Sydney were now $210 per square metre, followed by Brisbane ($137/ sqm), Perth ($133/ sqm) and Melbourne ($126/ sqm).   

Source: Knight Frank

“Alongside face rental growth incentives have also fallen slightly, which has seen stronger growth in effective rents, particularly in precincts where rents have historically been lower, such as Sydney’s Outer West and South West and Melbourne’s West,” Templeton said.  

“In Sydney the South Sydney market is the tightest, with no vacancy recorded since Q3 2021, while the Inner West and Outer West experienced significant vacancy decline in 2022. The limited vacancy has left tenants with no choice but to negotiate or renew leases for space three to 12 months in advance.    

“In Melbourne availability of good space is becoming more of an issue, with only secondary stock immediately available in the over 5,000 sqm range.” 

“We expect further rental growth in the industrial market over 2023, but it is likely to be at a slower pace closer to 10% on average, particularly as more supply is delivered and vacancy likely ticks up from its extremely low current levels towards the end of the year.”   

Knight Frank Chief Economist Ben Burston said 2023 was forecast to be a record year for new developments across the East Coast with 2.5 million square metres expected to be delivered. 

“Brisbane is leading this with over one million square metres to be delivered, which is more than triple the historical average,” he said.  

“Sydney is expected to add 855,000 square metres and Melbourne 670,000 square metres, after this city led completions in 2022, with more than 1.3 million square metres in new supply.  

“Given the construction delays in 2022, multiple projects were pushed in 2023 and thus it is forecast for a record year of new developments which will provide some relief to the undersupplied markets.”  

Burston said the strength in the leasing market and widespread rental growth had offset the impact of rising rates and higher funding costs on asset values, and was expected to continue doing so despite yields rising by around 75 basis points in most markets since April last year. 

“Supply will continue to be tight over the mid-term, so the demand-supply imbalance will see rents continue to rise,” he said.  

“The demand-supply imbalance will remain particularly acute in Sydney this year, where an equilibrium is unlikely to be restored until a larger quantum of developable land comes online in 2024- 25.  

“Ultimately structural undersupply in industrial markets will not be resolved until significantly more developable land comes online.”