Words by Australian Property Markets News

After being the most active industrial city in the country in recent years, take-up for industrial warehouses has slowed substantially in the first half of 2023 across the Melbourne market, down 45% from the same point in 2022. However, despite softening demand, Colliers industrial experts anticipate that vacancy for future supply across all markets in Victoria will hover between 2% and 0% by 2026, which will preserve the last two years of gains in effective rents despite more challenging economic conditions.

Colliers’ data reveals that speculative supply across Melbourne will jump by 42% in 2023 compared to 2022. Demand continues to outweigh supply by a substantial margin, which will continue to drive down vacancy and place upward pressure on effective rents.

Gordon Code, Colliers’ Joint Head of the Victorian Industrial Business, said, “Industrial occupiers have recently shown a greater desire to accommodate newer, modern premises to meet operational efficiencies and expansions. Partly driven by the minimal vacancy for existing A-grade stock and with B and C-grade supply no longer appropriate for most corporate industrial occupiers due to design inefficiencies and OH&S issues.”

“The shift in industrial preferences has led to short-term shortages of speculative supply to cater for latent demand and can be captured by developers in all Melbourne’s industrial precincts into late 2024 before more supply is forecasted to come available in 2025.”

“The issue is that demand isn’t being met, as there’s not enough new supply, making speculative stock extremely competitive and being snapped up about 18 months prior to competition across all Melbourne’s industrial markets,” said Mr Code.

Colliers Director of Research, Luke Crawford, expects supply to fall well short of demand, pushing the record low vacancy even further, with Melbourne’s industrial vacancy rate at present measuring 0.8% in June 2023, down from 1.0% at the same point in 2022 and 2.3% in mid 2021.

“The supply and demand imbalance is evident in rental growth, with speculative rents (weighted average) increasing by 11.8% over the past 12 months. Speculative rental growth has been more pronounced in Melbourne’s North and West submarkets, both of which saw face rental growth in excess of 20%, Mr Crawford said.

Colliers data shows that 761,000 sqm of speculative supply will be delivered in Melbourne in 2023, of which 374,000 sqm has already been committed.

“At present, around half of the spec pipeline for 2023 is already committed, and the balance is likely to be leased before completion, which provides little reprieve for occupier demand given vacancy rates remain at all-time lows,” added Hugh Gilbert, Colliers’ Joint Head of the Victorian Industrial Business.

For 2024, the speculative pipeline currently sits at around 500,000 sqm of supply. However, healthy commitment levels have already been recorded, providing a window of opportunity for landowners in Melbourne to capitalise on a period of high occupier demand and limited speculative supply over the next 18 months.

“Given the lack of leasing options, industrial land owners are capitalising on the favourable leasing market and are progressing speculative developments as most facilities delivered in recent years have been leased before practical completion.”

“For the market to meet demand, we need planners to alleviate zoned employment land shortages across Melbourne to reduce land costs. In addition, the construction price will also have to continue to ease,” Mr Gilbert said.