Q4 2022 – Melbourne Industrial Market
February 10th 2023 | , Urban Property Australia
- Transactional activity in the Melbourne industrial market totalled $4.8 billion over 2022, its second highest annual level on record, three times the 10-year average;
- Rental growth gained momentum across all precincts in the Melbourne industrial market, with 20% annual growth rates recorded for both prime and secondary Melbourne industrial assets over the past year;
- Industrial leasing activity in the Melbourne industrial market totalled 1,800,000sqm over 2022, an all-time record.
Industrial Market Summary
Transactional activity in the Melbourne industrial market totalled $4.8 billion over 2022, its second highest annual level on record. Driven by the growing penetration of e-commerce, industrial leasing activity in the Melbourne industrial market totalled 1,800,000sqm over 2022, an all-time record. As a result of the strong tenant demand, rental growth gained momentum across all precincts in the Melbourne industrial market, with 20% annual growth rates recorded for both prime and secondary Melbourne industrial assets over the past year.
Sales Volume / Yields
Transactional activity in the Melbourne industrial market totalled $4.8 billion over 2022, its second highest annual level on record, three times the 10-year average. 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 58% of total sales. Influenced by the major portfolio transactions, offshore purchasers accounted for 33% of the volume of industrial sales in 2022, 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 December 2022 to average 4.60%. 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.
New Supply / Land Values
With institutional groups increasingly boosting their exposure to the industrial sector, annual new supply delivered in Melbourne industrial market surpassed one million square metres for the third consecutive year, last year. Once again Urban Property research forecast that new industrial supply will surpass million square metres with 1,500,000sqm of new industrial stock expected be delivered in 2023. 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 50% of new supply pre-committed. The bulk of the new stock expected to be completed this year is located in the Western (55%) and South Eastern (30%) 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 30% over 2022. The scarcity of developable industrial land and improving business outlook is likely to led to further land value growth.
Tenant Demand
Industrial leasing activity in the Melbourne industrial market totalled 1,800,000sqm over 2022, an all-time record. 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 North regions which collectively accounted for 62% 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 1.2% as at December 2022 with the South East vacancy rate below 1%.Elsewhere, the vacancy rate of the Northern region is 1.4% and 0.8% 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 20% over 2022 with secondary rents having increased by 18% as tenants struggle to source accommodation of all qualities. Prime rental growth was led by the Western precinct. Urban Property Australia expects that rents will continue to increase through this year as landlords recover the increased costs of new developments.
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