Warehouse tenants have been quick to lock down industrial space, resulting in a 12% quarter-on-quarter contraction for existing vacant space on the east coast during Q4 2021.

According to new Knight Frank research, there was a continuation of rental growth rates of about 2% during Q4 in most markets and a rise of between 3.8-6.2% on average over the year.

Katy Dean, Head of Industrial Research for Knight Frank Australia, said demand for the industrial sector was expanding at a rapid rate.

“Online retail has continued to diversify, driving demand for warehouse and distribution space across the country from a broadening range of industries,” Dean said.

“Interestingly, though total retail spending is still above pre-pandemic levels, there was a 4.4% fall in December which is likely attributable consumers bringing forward their Christmas spending to November to take advantage of online events like Cyber Monday and elevated demand from coming out of lockdowns in October.”

Dean said supply chain disruption, together with a run-up in demand for global commodities, continued to be a major factor in inflation upswing, which had reached record highs in major economies and added price pressures to goods.

“In the December quarter, CPI rose 1.3% and 3.5% year on year and for the industrial sector the cost pressures have escalated industrial building construction costs and caused project delays,” she said.  

“We expect stronger GDP, income and investment growth from the middle of this year as the effect of the pandemic fades.” 

There was about 1.2 million sqm of industrial stock leased in Sydney in 2021, surpassing the previous two years. 

As vacancy declined to record lows, prime rents rose 2.3% in Q4 and new development increased to a new high of 750,000 sqm in 2022. 

In Melbourne, industrial land values continued to grow, as leasing demand reached unprecedented levels. 

This was driven by developer appetite for the west and north regions, where the value of 1-5 hectare lots rose by 81% and 54% YOY. 

Vacant space in Brisbane fell a further 19% in Q4 to be 44% lower than at the start of 2021.  

Land value growth accelerated in the Queensland capital, with prices of 1-5ha sites up 39% YOY, reflecting strong demand and limited stock. 

In Adelaide, prime yields reached a new benchmark, as land constraints amid a sustained upswing in demand levels drove land value growth. 

Small lots in Adelaide’s outer south, inner west and inner north markets rose on average 30% in 2021. 

On the investment front, Dean said investors continued their rally on industrial real estate, propelled by the sustained surge in warehouse demand and significant value creation potential from increasing exposure to this sector. 

“Investment volumes have surged past previous estimates, with 2021 tipping over $19 billion, by far the highest on record for the sector,” she said.  

“Investor demand has been exceptional, with an unprecedented amount of capital targeting the sector, influenced by the strength of occupier demand with the consequential outlook for rental growth. 

“There have been an increasing number of joint venture capital partnerships, particularly the mixing of offshore capital with local expertise, which reflects the shift in expectations regarding pandemic duration and ongoing border closures.” 

Dean said industrial yields were converging nationally, with the structural changes in the occupier market translating into a fundamental re-rating of the industrial sector by investors.  

“Reflecting this shift, pricing has adjusted and a further 25bps compression of super prime yields was recorded Q4 in Perth and Adelaide to reach 4.5% on average, while Brisbane compressed 5bps to 4.15% on average,” she said.  

“After compressing 50bps in Q3, super prime yields are stable at 3.5% in Melbourne and Sydney is stable at 3.75% after a rapid pace of compression in the first half of 2021.”