• Transactional activity in the Melbourne industrial market has exceeded $3.7 billion in 2022 to date, its second highest annual level on record with offshore purchasers accounting for 42% of the volume of the sales;
• Rental growth gained momentum across all precincts in the Melbourne industrial market, with double digit recorded for both prime and secondary Melbourne industrial assets over the past year;
• The growth of e-commerce has driven tenant demand outpacing new supply, leading to Melbourne’s industrial vacancy rate falling to 1.3%.

Industrial Market Summary

Transactional activity in the Melbourne industrial market has exceeded $3.7 billion in 2022 to date, its second highest annual level on record. Industrial yields have marginally eased yields but are expected to remain steady in the short term as investors aggressively continue to seek prime industrial investment opportunities. Rental growth gained momentum across all precincts in the Melbourne industrial market, with double digit recorded for both prime and secondary Melbourne industrial assets over the past year.

Sales Volume / Yields

Transactional activity in the Melbourne industrial market has exceeded $3.7 billion in 2022 to date, its second highest annual level on record. Urban Property research showed that transactional activity in the Melbourne industrial market was focused on the key precincts of the West and South East which collectively accounted for 60% of total sales. Influenced by the major portfolio transactions, offshore purchasers accounted for 42% of the volume of industrial sales in 2022 to date, well above their average annual share of sales.

Industrial yields have marginally eased in line with the increasing cost of debt as investors seek to increase their exposure to the sector underpinned by the ongoing growth of e-commerce. Average prime yields have decompressed by 25 basis points over the year to September 2022 to average 4.25%. While funding costs remain low and rental growth becomes more pronounced, Urban Property Australia anticipates that yields will remain steady as investors aggressively continue to seek prime industrial investment opportunities.

Melbourne Industrial Sales

New Supply / Land Values

With institutional groups increasingly boosting their exposure to the industrial sector, annual new supply delivered in Melbourne industrial market has surpassed one million square metres for the third consecutive year. Urban Property research forecast that 1,250,000sqm of new industrial stock will be delivered in 2022. Looking ahead new supply levels will remain elevated with tenant demand robust driven by the growing e-commerce sector. New supply continues to struggle to meet the robust demand from occupiers with 60% of new supply pre-committed. The bulk of the new stock expected to be completed this year is located in the Western (60%) and South Eastern (35%) regions.

Declining land supply coupled with elevated tenant demand is placing upward pressure on land values as owner occupiers compete with institutional owners. Average industrial land values have increased by 40% over the 12 months to September 2022. The scarcity of developable industrial land and improving business outlook is likely to led to further land value growth.

Melbourne Industrial Construction Activity

Tenant Demand

Industrial leasing activity in the Melbourne industrial market has totalled 200,000sqm in 2022 to date, slightly below levels achieved in the same period last year, however still above the 10-year average. The growing penetration of e-commerce has resulted in a significant lift in tenant demand. Retailers and wholesale trade boosted by the lift in non-discretionary spending have led tenant demand followed by logistics occupiers with leasing activity above the long-term average. The focus of the tenant demand has been on the Western and South Eastern regions which collectively accounted for 65% of gross take-up according to Urban Property Australia research.

Vacancy / Rents

Vacant industrial space across the Melbourne market continues to decline through 2022, as the growth of e-commerce has driven tenant demand outpacing new supply. Urban Property Australia research estimates that Melbourne industrial vacancy rate currently stands at 1.3% as at September 2022 with the South East vacancy rate below 1%.Elsewhere, the vacancy rate of the Northern region is 1.5% and 0.7% in the West, supporting rental growth across the market.

Rental growth gained momentum across all precincts in the Melbourne industrial market, coupled with a decrease in incentives levels from landlords. The underlying strength in the retail trade and logistics demand is contributing to a rise in leasing activity with strong demand for larger facilities to accommodate automated supply chain requirements.

Prime industrial rents have grown on average by 15% over the year to September 2022 with surprisingly secondary rents having increased by 20% as tenants struggle to source accommodation. Prime rental growth was led by the Western precinct. Urban Property Australia expects that rents will continue to increase over 2022 and into 2023 as landlords recover the increased costs of new developments.

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