Investor demand for industrial assets continue to be incredibly strong with more than $2.5 billion transacted last year, an all-time high;

While COVID-19 impacted supply chains, a rapid acceleration of e-commerce has led to a large amount of enquiry for additional space particularly from logistics occupiers;

More than one million square metres of new industrial stock is forecast be delivered to the Melbourne market in 2021, the highest amount of new supply completed in a year since 2008.

Industrial Market Summary

While COVID-19 impacted supply chains, a rapid acceleration of e-commerce has led to a large amount of enquiry for additional space. Increased spending on consumer staples and demand from logistics occupiers has underpinned tenant demand. Having proven to be resilient through the pandemic, investor demand for industrial assets continue to be incredibly strong.

Sales Volume/Yields

With the on-set of the pandemic highlighting the importance of the industrial sector, and its resilience compared to the office and retail sectors, investor demand for industrial assets continued to be incredibly strong in 2020. Across Melbourne’s industrial market, Urban Property recorded more than $2.5 billion was transacted in the sector, an all-time high and indeed 46% higher than the previous record year of 2008 when $1.7 billion was transacted. Transactional activity in the Melbourne industrial market was focused on the key precincts of the South East and West which collectively accounted for 71% of total sales. In contrast to 2020, transactional activity this year has been very limited to date with only $150 million transacted in the first quarter of 2021.

Investor demand for industrial assets has been underpinned with the pandemic driving faster take up of e-commerce and online retail penetration, bolstering demand for warehouse and distribution space across the country. In contrast to the office and retail property sectors, yields for the industrial sector have firmed through the past 12 months. Prime Melbourne industrial yields range between 4.50% and 5.00%, with secondary Melbourne industrial yields ranging between 5.75% and 6.50%.

Melbourne Industrial Transactinoal Activity By Region

New Supply/Land Values

Driven by a number of major pre-commitments, approximately 850,000sqm of industrial completions in 2020, the highest annual level since 2008. More than 60% of the stock completed last year was located in the Western region. Looking forward, Urban Property Australia forecasts that more than one million square metres of new industrial stock will be delivered to the Melbourne market in 2021. Of the stock currently under construction, 46% of the space scheduled for completion this year is already pre-leased. The bulk of the new stock expected to be completed this year is once again located in the Western region.

In the industrial land market, growth in land values continue to be supported by strong levels of underlying demand and a scarcity of developable industrial land. Strong tenant demand has run ahead of available supply, leading to upward pressure on land values as developers seek opportunities to cater to this tenant demand. Meanwhile, increased levels of development and rezoning have led to a reduction in developable industrial land across the Melbourne industrial market. Reflecting this declining state of developable land, land values in Melbourne have experienced significant year on year growth of more than 20% over the past two years.

Melbourne Industrial Construction Activity

Tenant Demand

While COVID-19 impacted supply chains, a rapid acceleration of e-commerce has led to a large amount of enquiry for additional space. Increased spending on consumer staples and a rise in the manufacturing and storage of pharma goods is driving tenant demand. There is also strong demand from logistics occupiers trying to fulfil mandates for 3PL (third-party logistics) contract space and this is helping absorb some of the speculative space that has been delivered recently. Urban Property Australia research revealed that leasing activity over the 12 months to March 2021 was led by the West, followed by the North and South East with only minimal activity recorded in the City Fringe precinct.

Vacancy/Rents

Vacant industrial space across the Melbourne market increased marginally through the 12 months to March 2021, having now risen to its highest level since 2017. Vacant industrial stock increased in both prime and secondary buildings with the bulk of the increase of vacancy resulting from occupiers moving into pre-committed new developments. Urban Property Australia research estimates that Melbourne industrial vacancy rate currently stands at 8% as at March 2021.

Rental growth was subdued across all precincts in the Melbourne industrial market in the year to March 2021, although there was a slight rise in incentives levels from landlords. The underlying strength in the retail trade and logistics demand is contributing to a rise in leasing activity and the demand for modern facilities remains partly unsatisfied. Urban Property Australia expects that this unsatisfied demand is likely to see rental growth rates improve over the next 12 months.

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