Q4 2021 – Melbourne Industrial Market
January 26th 2022 | , Urban Property Australia
Across Melbourne’s industrial market, more than $6 billion was transacted, exceeding the previous record annul level of $2.5 billion;
With institutional groups increasingly boosting their exposure to the industrial sector, new supply of industrial stock in Melbourne is projected surpass one million square metres for three consecutive years;
Vacant industrial space across the Melbourne market decreased through the year, as tenant demand outpaced supply, falling to all-time lows.
Industrial Market Summary
Driven by insatiable investor appetite, transactional activity in the Melbourne industrial market surpassed $6 billion in 2021, its highest level on record. Indeed, the level of sales recorded in 2021 was triple the 10-year average annual volume of industrial sales in Melbourne. Influenced by the major portfolio transactions, offshore purchasers accounted for the majority of industrial properties sold over the year.
Sales Volume/Yields
Driven by insatiable investor appetite, transactional activity in the Melbourne industrial market surpassed $6 billion in 2021, its highest level on record. Indeed, the level of sales recorded in 2021 was triple the 10-year average annual volume of industrial sales in Melbourne. Urban Property research showed that transactional activity in the Melbourne industrial market was focused on the key precincts of the West and Southeast which collectively accounted for 79% of total sales. Influenced by the major portfolio transactions, offshore purchasers accounted for 54% of the volume of industrial sales in 2021, their highest share of industrial property sales in Melbourne in a decade.
Yields have continued to compress as investors seek to increase their exposure to the sector underpinned by the ongoing growth of e-commerce. Average prime yields have compressed by 90 basis points over 2021 with portfolio sales setting new benchmarks for the sector. While funding costs remain low and rental growth becomes more pronounced, Urban Property Australia anticipates that yields will compress further as investors aggressively seek investment opportunities.
New Supply/Land Values
With institutional groups increasingly boosting their exposure to the industrial sector, new supply of industrial stock in Melbourne is projected surpass one million square metres for three consecutive years. After an all-time high of 1,200,000sqm of new industrial stock delivered in 2021, Urban Property research forecast that 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 62% of new supply pre-committed. The bulk of the new stock expected to be completed this year is located in the Western and South Eastern 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 50% over 2021. The scarcity of developable industrial land and improving business outlook is likely to led to further land value growth.
Tenant Demand
The growing penetration of e-commerce has resulted in a significant lift in tenant demand through 2021. 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 Southeastern regions which collectively accounted for 75% of gross take-up according to Urban Property Australia research.
Vacancy/Rents
Vacant industrial space across the Melbourne market decreased through 2021, 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 1.2% as at January 2022 with the Southeast vacancy rate below 1%.
Rental growth gained momentum across all precincts in the Melbourne industrial market in 2021, 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. Urban Property Australia expects that rents will continue to increase over 2022 as landlords recover the increased costs of new developments.
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