Like every industrial market around Australia, Melbourne has been experiencing the same restricted leasing conditions, with the shortage of warehouses to meet the huge demand we have seen in the market over the past few years.
Like every industrial market around Australia, Melbourne has been experiencing the same restricted leasing conditions, with the shortage of warehouses to meet the huge demand we have seen in the market over the past few years.
During COVID we saw e-commerce take off as online purchasing soared, with warehouse requirements doubling for some occupiers.
In Q1 the city reached a new low in available space of 174,330sq m after vacancy fell by 25 per cent, and consequently rents rose by 1.5 per cent. Over 2022 rents rose by 19 per cent in total after industrial vacancy fell by 70 per cent.
Vacancy is still low, but this year is forecast to be a record year for supply across the East Coast, with Melbourne expected to deliver 845,231sq m after leading completions in 2022, with more than 1.3 million square metres in new supply.
This supply has been brought on in response to demand, with institutions buying up land to deliver speculative developments.
The question now is whether that supply will alleviate the shortage of space we have been seeing, and even lead to a rise in vacancy, particularly if there is a corresponding fall in demand due to the current economic climate, with cost of living increases and potential reductions in consumer spending.
Two factors will underline occupier demand in Victoria
While we are crystal balling, we believe occupier demand levels will be somewhat maintained in Melbourne’s industrial market, with population growth in the city being one of the major factors holding demand up. Population growth is likely to go a long way to counter falls in consumer spending that may see a reduced need for warehousing in the state, and has indeed already led to some sublease space coming onto the market.
It has long been said that Melbourne would overtake Sydney as Australia’s most populous city, and that milestone came in April. It was due to a technicality, with the boundaries used by the Australian Bureau of Statistics having changed to include Melton on the city’s western fringe. But in any case, Melbourne’s population is now 4,875,400, with Sydney having 18,700 fewer people.
Looking much further ahead, Melbourne’s population is expected to reach almost eight million by 2051. Strong population growth is forecast for the years ahead, particularly as overseas migration rebounds, with Melbourne expected to be the fastest growing city from 2023-2024. Melbourne has long had a greater share of net overseas migration compared to Sydney, while in ordinary circumstances the city also sees strong net internal migration than Sydney. The city also has a larger natural increase in population.
The other major factor underlining demand in Melbourne’s industrial market is its relative affordability to Sydney, which is likely to attract more occupiers. According to Knight Frank’s latest research, prime net face rents in Melbourne are $128 per square metre, compared to $227 per square metre in Sydney.
Opportunities for tenants
As more industrial space comes online in Melbourne this year tenants will have more choice in the stock they can choose from, in terms of sizes, specifications and location, which is a marked change from recent years. This will give occupiers the opportunity to find something that better suits their requirements.
New stock will also be of a higher quality, with better efficiencies and technology, so we expect to see a flight to quality with tenants able to relocate from older B-grade sheds, which can then be refurbished to bring them up to a higher standard.
Where to from here?
In conclusion the next 12 to 18 months in the Victorian industrial market is going to be an exciting one.
A lack of titled and zoned industrial land is keeping industrial land values at an all-time high. Development costs are holding strong and interest rates are still climbing… all this does is create an equation for continued rental growth.
The speculative development coming online will do little to ease the pressure.
Institutional owners may begin to offer some increased rental incentives to secure the bigger occupier requirements into their new development portfolios that have reduced risk.
By Joel Davy