- Critical shortage of industrial warehouses in Victoria expected to persist.
- Warehouse shortage driving demand for speculative supply.
- Opportunity for landowners to capitalise on supply shortfall.
Demand for industrial warehouses has slowed markedly in Melbourne, with activity in the first half of 2023 dropping in the formerly busiest industrial city by 45% since the same period in 2022.
Nevertheless, Colliers experts predict that the low vacancy plaguing Victoria will stay, with vacancy across all markets expected to linger around 2% to 0% up to 2026. The supply shortfall will sustain the growth of effective rents experienced in the previous two years, despite the dour economic conditions of the present.
Colliers’ analysis anticipates a speculative supply jump across Melbourne of 42% in 2023 compared to last year. Demand persistently outpaces supply significantly, repressing vacancy and creating upward pressure on effective rents.
New needs in a market with no supply
“Industrial occupiers have recently shown a greater desire to accommodate newer, modern premises to meet operational efficiencies and expansions. Partly driven by the minimal vacancy for existing A-grade stock and with B and C-grade supply no longer appropriate for most corporate industrial occupiers due to design inefficiencies and OH&S issues,” says Gordon Code, Colliers’ Joint Head of Victorian Industrial Business.
“The shift in industrial preferences has led to short-term shortages of speculative supply to cater for latent demand and can be captured by developers in all Melbourne’s industrial precincts into late 2024 before more supply is forecasted to come available in 2025.”
“The issue is that demand isn’t being met, as there’s not enough new supply, making speculative stock extremely competitive and being snapped up about 18 months prior to competition across all Melbourne’s industrial markets,” Code adds.
Luke Crawford, Colliers Director of Research, believes that the unmet demand and supply shortfall will cause vacancy rates to plunge to new all-time-lows, as Melbourne’s industrial vacancy rate currently stands at an unprecedented 0.8%, having dipped from 1.0% at the same point last year, and 2.3% in mid-2021.
“The supply and demand imbalance is evident in rental growth, with speculative rents (weighted average) increasing by 11.8% over the past 12 months. Speculative rental growth has been more pronounced in Melbourne’s North and West submarkets, both of which saw face rental growth in excess of 20%,” Crawford says.
According to Colliers’ data, 374,000 square metres (sqm) of the 761,000 sqm speculative supply due for delivery in Melbourne this year is already committed.
“At present, around half of the spec pipeline for 2023 is already committed, and the balance is likely to be leased before completion, which provides little reprieve for occupier demand given vacancy rates remain at all-time lows,” says Hugh Gilbert, Colliers’ Joint Head of the Victorian Industrial Business.
Golden opportunity for industrial landowners
About 500,000 sqm of speculative supply is set to hit the market in 2024, much of which has been committed, presenting landowners with a critical window to take advantage of the predicted demand and supply incongruity over the following 18 months.
“Given the lack of leasing options, industrial land owners are capitalising on the favourable leasing market and are progressing speculative developments as most facilities delivered in recent years have been leased before practical completion,” Gilbert says.
“For the market to meet demand, we need planners to alleviate zoned employment land shortages across Melbourne to reduce land costs. In addition, the construction price will also have to continue to ease.”
