THE PROPERTY DEVELOPMENT REVIEW
INDUSTRIAL REAL ESTATE KEEPS SHOWING ITS RESILIENCE
By Michael Wall, Callum Stenson & Matt Ellis - Savills Industrial & Logistics
East Coast vacancy rates (+3,000sqm buildings)
Source: Savills and SA1 Property
“During the first year of the pandemic, businesses increased inventory holdings, replacing ‘just in time’ with the ‘just in case’ model and accumulated large inventories, which needed warehousing,” said Michael Wall, National Head of Industrial & Logistics at Savills Australia. “This led to an uptick in tenant demand for warehouse space, at the same time household consumption was also rapidly rising. “Coupled with record low supply, this drove above average leasing take-up rates on existing product and high pre- commitment levels on new supply.” Wall said “Vacancy declined to a historical low on the east coast, reaching c.1.0% in mid 2022, down from c.4.5% pre-pandemic. “At the time, there were some precincts in Sydney, Melbourne and Brisbane that averaged a vacancy rate as low as 0.3% and some that had little to no availability of buildings greater than 20,000sqm.” “But we’re now looking at a very different landscape to this time last year,” says Wall. Callum Stenson, QLD State Director of Industrial & Logistics at Savills Australia said “Supplier delivery times have shortened, effectively reversing the backlogs across the supply chain seen a year ago. “The shift in demand has allowed businesses to restock inventories back to desired levels, which for many industries is higher than they used to be, providing a buffer against future disruptions.” “However, high interest rates and inflationary pressures are starting to weigh on tenant requirements,” says Stenson. “Very tight labour market conditions are also impacting some firm’s ability to support current operations, which in some cases is pushing out delivery lead times and seen some reduce their capacity and inventory holdings.” “The frenetic pace of industrial leasing seen over the last two years has begun to normalise and vacancy rates have continued to tick up slightly,” says Stenson. On the east coast, vacancy (+3,000sqm buildings) averages 1.7% to 1.8%, up from 1.6% in July and 1.3% in April 2023, according to new analysis by Savills and SA1 Property. By location, Sydney whole building vacancy (+3,000sqm) is 1.43%, up from 1.09% in July. In Brisbane, vacancy has increased marginally, rising to 2.15%, up from 1.9% in the previous quarter. While in Melbourne, whole building vacancy sits at 1.85%, just down from 1.96% in July. Despite the uptick in overall vacancy, there are still some precincts on the East Coast that average rates less than 0.5%,
including Sydney’s North Shore (0.51%) and Sydney’s North West (0.4%). There are also precincts that have 0% vacancy for buildings over 10,000sqm, including Port Melbourne, and Brisbane’s North and South East, which may be feeding the rise in pre- commitment rates during the last quarter. Matt Ellis, VIC State Director of Industrial & Logistics at Savills Australia said, “There’s still active demand from companies looking to expand despite greater scrutiny over the economic outlook. “Those businesses that hold inventory no longer need that unusually large buffer that we saw in 2020 due to supply chain backlogs, with expansion plans now reflecting the structural changes on the back of population growth to future proof their businesses in one or two years time. “We’ve seen this in Melbourne recently with an increase in pre-commitment activity, particularly in that 20,000sqm to 40,000sqm pocket, where there has been limited options for these occupiers. “Melbourne’s West and Northern precincts for example still hold a vacancy rate of close to 1.0% in buildings over 10,000sqm and in the fringe, there’s no vacancy,” says Ellis. Wall said “The structural tailwinds for industrial and logistics are very healthy, and this continues to be supported by the investment appetite to deploy capital through this cycle, but there is some caution in the broader economy, with the early emergence of sublease space on the market. “On the back of this, developers are likely to take a more cautious approach on future development levels and rental growth assumptions, despite recent record growth.” “While the pace of activity has pulled back, the increase in vacancy has allowed greater churn of existing space and led to a rise in take-up volumes during Q2 to c.1.2 million sqm, up from around 807,000sqm in Q1, and the busiest quarter since mid 2022,” said Wall. Transport & logistics and retailers/wholesalers leased about 737,000sqm of warehouse space in Q2, according to Savills Research. Stenson adds, “While that is less than the 937,000sqm leased in the same period a year earlier, it is still higher than its pre- pandemic 600,000sqm decade average. “The trend suggests that the economic headwinds are being partially offset by an even sharper focus on securing supply chains and building in efficiencies to cope with rising costs, including increased labour, transport, and rental rates.”
October / November 2023 – 17
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