- Australia boasts the world's lowest industrial vacancy rate.
- More sublease space is entering the market, especially in Sydney and Melbourne.
- Occupiers still prioritise top-tier space, impacting rents and incentive.
Australia has come in first in the world for having the lowest national average vacancy rate in the industrial and logistics market, according to CBRE’s H2 2023 Australia Industrial and Logistics Vacancy Report.
Industrial space still the hottest commercial property
While the report found a bump in vacancies for all major markets nationwide, overall vacancy remains at a meagre sub 2%. Sydney claimed the crown for having the lowest vacancy rate of any city worldwide, at 0.5%.
“We are now beginning to see upward movement in the vacancy rate across all major markets. Although the movements are not significant and remain at relatively low levels, we expect this increase to continue throughout 2024 as demand normalises and greater supply enters most markets,” said CBRE head of industrial and logistics research, Sass J-Baleh.
Net absorption rose to 1.1 million square metres (sqm) across H2 2023 and remained led by occupier expansion. Much of this activity was focused within Sydney and Melbourne.
According to Ray White‘s research, industrial assets reign supreme in terms of five-to-10-year total annual returns, making them the most prized commercial asset among investors.
Industrial the top performing commercial asset
“The greater net absorption in these two markets is owing to new floorspace being readily absorbed, with a combined total of 1.3 million sqm of new supply being added to Sydney and Melbourne over H2 2023,” J-Baleh said.
CBRE industrial and logistics regional director, Cameron Grier, predicted that occupiers would have more options in 2024, although their preferences would fall along the flight-to-quality trend. In addition, he said that despite the increased supply, most markets will fall short of historical vacancy levels.
In other words, the supply and demand mismatch will continue.
Sydney trends
Vacancies levels persisted at record lows in Sydney, owing to a scarcity of space, although they have risen marginally from the 0.2% vacancy posted in the first half of the year.
This was attributed to more sub-lease activity, which accounted for 70% of the market’s total vacant space.
“There will be an increasing number of vacancies coming online in the first half of next year so we can expect vacancy to exceed 1% by mid-2024,” said CBRE Western Sydney managing director, Michael O’Neill.
“There will be leases that reflect rental growth in early Q1 but more broadly rents will stabilise with upward pressure on incentives likely. Most of the new stock coming online in Q1 and Q2 will be larger format space in the Outer West but there will be a combination of speculative, existing, and sublease vacancy in all markets.”
“Essentially the market will begin to normalise after two years of extraordinary growth.”
Michael O’Neill, CBRE Western Sydney
“Land supply continues to be impacted in parts of the Mamre Road and Aldington Precinct which will alleviate some of the downward pressure caused by the inflated cost of capital and construction.
“While capital values continue to be negatively affected by yields softening, moderating rental growth and historically low vacancy will continue to preserve value.”
Melbourne trends
Melbourne’s vacancy rate saw a modest bump, rising to 1.6%
North and Southeast/East vacancy rates stayed put over the year’s second half, at 0.7% and 1.4%, respectively.
“The major movement in the vacancy rate over H2 2023 was recorded in the West precinct, from 1.4% 1H23 to now at 2.9%. Several sub-lease spaces were recorded in the West precinct– representing around 20% of total space available in this market,” said CBRE senior director, Tom Murphy.
“Greater availability in the West has pushed Melbourne’s average vacancy up from 1.1% in H1 2023 to 1.6% in H2 – to be the highest in the country.”
Brisbane trends
The Brisbane market witnessed the most significant swing in vacancy rates between the first and second halves of 2023, growing to an average of 1.4%.
Formerly the area with the lowest vacancy rate in Brisbane, the South precinct saw its vacancy rate skyrocket from 0.3% to 2.7%, making it the region with highest vacancy rate.
Much of the vacant space comprised secondary-grade stock.
The M1 Corridor saw a fivefold increase in its vacancy rate, from 0.4% in the first half of 2023 to 2.0% in the second half of 2023.
On the other hand, the remaining precincts in Brisbane have mainly stayed tight.
Brisbane’s net absorption plummeted over the year’s second half by over 50% compared to the year’s first half.
“Demand has slowed over the last couple of months with the majority of the 2023 take-up happening in the first quarter of the year. There are still deals happening, but not the same level of urgency,” said CBRE state director, Peter Turnbull.
“Construction pricing remains high, which is continuing to slow the rate of speculative stock commencing. We are now starting to see for the first time some sub-lease space coming to market, as customers with third-party logistics providers (3PL) begin to reduce their stockpiles and no longer require the space they leased in the pandemic period.
“We believe incentives will start to increase in 2024 as owners attempt to hold their face rents.”
Adelaide trends
Adelaide’s most significant vacancy rate decrease was experienced in the West precinct, falling from 4.5% in H1 2023 to 1.8% in H2 2023.
Nevertheless, other precincts saw an increase in vacancy rates, with the North West up by 120 basis points (bps), the Outer North by 110 bps, and the North by 20 bps.
“Several sale transactions have occurred in Q4 2023 demonstrating that appetite for land and value-add assets continue to drive activity in the South Australian market,” said CBRE state director, Jordan Kies.
“Vacancy remains tight, with the limited speculative development stock under construction being absorbed at a healthy rate. The gross occupancy cost of tenants is being monitored with notable increases in market rents, wages, fuel and transport, electricity, gas, and quite substantial recent increases in statutory outgoings which are generally passed on and recovered from the tenant.
“Whilst we’re yet to see this, we expect some sub-leasing activity to start to creep into the South Australia market.
“The lower end of the market continues to be in high demand with leasing and sales activity remaining buoyant. The occupiers forced out from South Road continue to look for new premises which continue to underpin the market.”
