APPD Market Report Article

Melbourne

May 31, 2022

14.3%

AUD 109

Rents
Rising

Strong demand remains well above average.

  • Gross take-up rebounded and increased 14.4% q-o-q (397,700 sqm). Quarterly take-up continues to sit above the 10-year quarterly average (228,500 sqm), a trend that has been accelerated since the beginning of the pandemic. The West precinct drove increased demand for the quarter, with total take-up at 205,700 sqm for the precinct.
  • Take-up by the Transport, Postal and Warehousing industry grew substantially, with total take-up of 145,500 sqm. This represents an 111% increase from 4Q21 (68,900 sqm). This accentuates the structural shift towards e-commerce and q-commerce, which is fuelling the strong demand into industrial assets.

Completions remain elevated yet Omicron delays deliveries

  • Completions remained relatively stable in 1Q22, with 284,600 sqm being delivered (5.15% increase q-o-q). Disruptions related to the Omicron variant in early 2022 has pushed out the delivery of many projects, with 381,900 sqm now expected to complete in 2Q22. Despite these disruptions, delivered projects in 1Q22 remained well above the 10-year quarterly average of 129,400 sqm.
  • 16 total projects reached completion in 1Q22, and all 16 projects were delivered with pre-commitment. Demand within the sector is driving an elevated supply pipeline, with 2022 expected to deliver 1,170,300 sqm of industrial stock, which is more than double the 10-year average (577,000 sqm). Completions were balanced across the precincts, with a substantial increase in the South East.

Rental growth continues to surge

  • Rental growth continues to increase, most notably in the South East precinct which recorded quarterly rental growth of 7.9% q-o-q (AUD 109 per sqm per annum). Availability constraints continue to persist with 100% of stock pre-committed in 1Q22 and 82.4% of 2Q22 stock already pre-committed. Rental growth is being fuelled by companies needing to address supply chain issues and business growth.
  • Investment volumes decreased from record volumes in 1Q22, to AUD 320.9 million. Transaction volumes were driven by acquisitions made by the Centuria Industrial REIT, who acquired four sites for a total of AUD 93.8 million. Investment sales accounted for the largest portion of all transactions (80.8%), as institutional investors look to increase their exposure to the growing industrial sector.

Outlook: Strong rental growth to persist through 2022

  • Rental growth is expected to be the theme throughout 2022, as demand continues to outstrip supply levels. Businesses demand for space continues to grow as they look to localise operations in response to supply chain constraints. Rental growth is expected through proportionately greater rents in new lease terms, as old terms reach expiry.
  • Yields in Melbourne are expected to stabilise and only compress slightly through 2022. The compression cycle is slowing and a higher inflation environment has increased borrowing costs. The supply pipeline, while growing, remains heavily pre-committed which will continue to drive rental growth.

Note: Melbourne Logistics & Industrial refers to Melbourne's industrial market (all grades).

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