_Industrial vacancies across East Coast Australia are at five-year lows.

Sustained demand across the cities of Sydney, Melbourne and Brisbane, primarily from 3PL and transport users has reduced the amount of available industrial space by more than a third over the past two years. This has triggered higher speculative construction, diminishing the existing development land banks.

Jennelle Wilson November 21, 2018

The total industrial vacancy on the East Coast currently sits at 1.47 million square metres, reflecting a 7.5% drop over the past quarter and an 11.4% reduction over the 12 months to October 2018. On an annual basis both the Sydney and Melbourne markets had a 15% fall in vacancy while the Brisbane market is down 3%. Figure 1 shows the sustained falls which has both the Melbourne and Brisbane markets at five-year lows and the Sydney vacancy 43% lower than its long-term average.

This sustained improvement over the past two years, with vacancy down 30%, can be attributed to the steady improvement in the Australian economy in tandem with the requirement for fast delivery aligned with on-line retailing.

As retailers and their service providers search for greater time and cost efficiencies in their delivery chain, both the upgrading of physical facilities (encompassing both location and building fabric) is being undertaken along with the greater insight that technology can now offer on the B2C delivery chain. Recently the residential development boom, now peaked, has also driven a number of building material suppliers to relocate and expand over the past 18 months, which has further driven leasing activity.

Across East Coast cities the demand for prime space has been clearly in evidence, accounting for 72% of total take-up. While each city was weighted towards prime absorption (Melbourne 68% and Brisbane 64%) the standout was Sydney with 86% of all take-up within prime space in the past quarter. Partially this is due to the reduction in secondary stock as gentrification and residential development is replacing older industrial facilities in inner/middle ring suburbs but also as the relentless drive towards greater delivery efficiencies drives tenants into new generation, prime facilities.

In Sydney the sustained reduction in industrial vacancy began in 2015 with the combination of relatively little new supply, sustained demand and a number of forced tenant relocations due to residential development displacing industrial uses. The removal of much of this older stock has seen the secondary market become particularly tight with only 52,512sqm (or 15% of total vacancy) considered to be secondary. Aligned with the demand for prime stock, and tenant preference for new generation buildings, the Outer South West has been the most active Sydney precinct, accounting for almost 70% of take-up in Q3 and vacant space falling by 44% over the past year, to reach the lowest levels on record.

Similarly in Melbourne, the land rich precincts of the South East and West have dominated recent activity. With the total vacancy at five-year lows, and rental growth triggered, developers have become more likely to increase their levels of speculative development with more than 150,000sqm expected to come on line in the West alone. The tenant appetite for speculative facilities was most obvious in the Brisbane market where 60,215sqm of speculatively developed space was absorbed in the quarter, 54% of the market’s total take-up.

The demand for new space has resulted in 333,055sqm of speculatively developed buildings being absorbed in the past year across the three cities, with half of this from the Melbourne market. This has depleted the current stock of speculative space either completed or under construction to six-year lows. This is triggering greater development activity and with significant industrial land held in institutional developer/investor hands these assets are developed to feed the continual requirement to grow funds under management.

While speculative development will never replace the Design & Construct cycle, particularly for users with specialised requirements, the ability of major institutional developers to bring on high quality industrial facilities gives the potential for rental enhancement, compared to the D&C bidding cycle. Additionally the creation of assets which have flexibility at their heart and a greater ability to cater for the second and subsequent generation of tenants, reduces the need for lengthy initial lease terms and enhances the asset as a long term investment.

To read greater insights on the current vacancy levels in the Sydney, Melbourne and Brisbane markets, see the individual reports.