National prime industrial rents top $200/sqm amid supply crunch
Rental growth across the industrial and logistics sectors is on the up this year, with national prime rents surpassing the $200 per square metre mark for the first time. It underscores the market’s standout performance in Australia’s commercial real estate market, but also comes with two major caveats.
In a Q2 overview by Colliers, researchers warn of looming development supply shortages brought on by high construction costs and the risks posed by possible future interest rate rises.
“What we’re really looking at is the August cash rate decision, and I think that will have a major influence on how occupiers will respond,” says Jordan Pangallo, senior research manager at Colliers.
“So if it holds, we’ll probably see a little bit more confidence; that will be then two cash rates being held, and that will give some occupiers some certainty.”
The official cash rate in Australia is 4.35 per cent, following three rate hikes earlier in the year and a hold in June. The next Reserve Bank of Australia rate announcement is scheduled for August 11.
Supply deficit and rate risks
Prohibitive construction costs have pushed national supply levels to below recent peaks, and this year’s pipeline is on track to be the lowest year of delivery in four years. Colliers data found year-to-date delivery is at 779,000 square metres – 30 per cent lower than at the same time last year.
The supply deficit is forcing vacancy rates down and rental prices up, but some cities are feeling the effects more intensely than others.
“When we talk about low supply, it can mean something different for different markets,” Pangallo says. “Low supply can mean there’s low delivery, but in some markets like Perth and Adelaide it can also mean a limitation of land availability or serviceable land availability, which is more prevalent in Sydney and Brisbane
“I think Perth is experiencing the crunch the most and so its vacancy rates are expected to potentially fall under 1 per cent, and we are going to keep seeing really strong rental growth there.”
The sharp lack of supply is likely to drive demand for alternative industrial development, such as vertical or multi-level buildings.
“We’ll start to see an adoption of multi-level industrial formats, and that might help ease some of the pressures that are happening within the market,” Pangallo says.
“They’ve already started, but I think it’s a little bit too early to see the adoption for those types of spaces. But if we look at other more developed markets globally, when land is constrained, that will be a push that may alleviate some of the pressures that are happening.”
State-by-state performance and key transactions
Of all the nation’s sub-markets, Melbourne’s north was the most active in the first six months of this year.
This was in large part owing to the lease of a huge 90,000 square metre site on Polaris Road, Mickleham. In sales activity, a 5.5 hectare site at 332 Bay Road, Cheltenham, sold for $53.8 million in May.
Brisbane overtook Sydney as the leading leasing market with researchers pointing to the city’s affordability and healthy population growth. A key sale in the June quarter was at 18-22 Hume Drive, Bundamba, for $39.75 million from GPT to TradeZone.
But Sydney still holds its own, with leasing activity rebounding in the June quarter after a subdued start to the year. In the three months to June, 275,000 square metres was leased, increasing the year-to-date take-up to 444,000 square metres.
Of its sub-markets, the north-west was busiest, with more activity so far this year than the previous two full calendar years. The massive $127.5 million sale of 3-11 Herbert Place, Smithfield, in June boosted the market.
Some key deals lifted leasing activity in Adelaide, including 13,782 square metres at 6-10 Senna, Wingfield, 10,000 square metres at 46-70 Grand Trunkway, Gillman, and 9300 square metres at 52 Ocean Steamers Road, Port Adelaide.
