- Rents are mitigating the impact of average national prime yields of 5.27%.
- Sydney and Melbourne's prime industrial assets continue to be the sector's most prized investments.
- For the sector to return to a 4.5% vacancy rate, an additional 2.9 million sqm of vacant stock would be required.
The industrial property sector proves its mettle in the face of a tumultuous economy. Average national prime industrial values move from $3,300 per square metre (sqm) in Q1 to $3,420 per sqm in Q2 this year, in spite of yields softening by around 18 basis points over the same period.
According to Colliers’ head of industrial capital markets Gavin Bishop, rents are mitigating the impact of average national prime yields of 5.27%, ensuring industrial values are now on par with where they were at the beginning of 2022, prior to the interest rate hikes and broader economic market fluctuations.
“Following a contraction in average capital values through parts of 2022 as yield expansion outpaced rental growth, the situation has now reversed.”
Gavin Bishop, Colliers’ head of industrial capital markets
“Average prime national rental growth of 40% over the last 18 months has established the industrial sector as a stalwart in the broader commercial real estate investment market.
“As attention is drawn to industrial yields, it’s important to note their diluted impact on values has continued to attract new institutional and offshore investors.
“More recently, this included Cadillac Fairview partnering with Gateway Capital to create a $1 billion logistics fund.”
The aforementioned deal which was sealed in April this year, centred on the acquisition and development of industrial and logistic assets across Australia.
As highlighted in the research, Sydney and Melbourne ably continued to be the champions of the sector’s most prized investments, with average rental growth of 48% and 29.9%, respectively, since Q1 2022.
Rents underpinned an 8.9% increase in Sydney’s prime industrial values over the same period, despite yields moving to 4.5% – 4.75%. Rents also shielded Melbourne’s industrial values, which have declined by a minor 2.8%, in the face of current prime yields moving to 4.75% – 5.00%.
Colliers director of research Luke Crawford said value-add investors looking to reposition or upgrade their assets drove the jump in industrial transaction momentum from $440 million in Q1 to almost $1.3 billion in Q2 this year. Leasing enquiry levels normalised following record demand in 2021 and 2022.
“While industrial leasing demand has subdued slightly due to economic conditions, the sector would need to jump from the current vacancy rate 0.8% to the equilibrium of 4.5%, before market rental growth could be questioned,” he said.
However, Crawford added that, for the sector to return to a vacancy rate of 4.5%, an additional 2.9 million sqm of vacant stock would need to become available, which hasn’t occurred since Colliers began tracking vacancy levels 10 years ago.
“Since 65% of stock currently under construction is committed, and rental growth has continued to outpace historical averages, we expect it to remain elevated throughout 2023.”
Furthermore, according to Colliers’ research, some industrial markets may witness over 30% rental growth for the 2023 calendar year.
