APPD Market Report Article

Melbourne

August 26, 2022

Annabel McFarlane, Senior Director - Research, Australia

17.7%

AUD 113

Rents
Rising

Demand moderates but remains well above average

  • Gross take-up decreased 26% q-o-q to 285,100 sqm but remains well above the 10-year quarterly average (236,500 sqm). Importantly, this decrease in take-up has not been driven by a decrease in demand, but rather by a lack of available space. The West precinct again showed the strongest take-up levels across the precinct, increasing 118,200 sqm q-o-q to 217,500 sqm.
  • Take-up was dominated by occupiers in the transport, postal and warehousing (115,200 sqm), and retail trade (94,500 sqm) industries. While the transport, postal and warehousing industry had the highest take-up, the two largest occupier moves of the quarter were by players in the retail trade industry, demonstrating the volume of unique demand within the transport, postal and warehousing sector.

Macroeconomic headwinds add pressure to construction projects

  • Completions decreased in 2Q22, with 218,700 sqm being delivered (23% decrease q-o-q). Developing macroeconomic issues in the form of inflationary pressures, rising cost of labour and supply chain constraints have again put pressure on the completion of construction projects. 381,900 sqm was expected to be delivered in 2Q22, illustrating the challenge for developers.
  • Ten projects reached completion in 2Q22, with 70% of space being pre-committed prior to completion. The supply pipeline remains elevated, with 2022 expected to deliver 1,088,800 sqm of stock. However, increasing costs of capital are likely to decrease the feasibility of proposed projects, tempering the future supply pipeline. Completions were led by the West precinct, delivering 117,600 sqm.

Upward pressure on rent continues

  • Prime rents continued their strong growth, most notably in the North and West, growing 8.4% (AUD 95 per sqm per annum) and 9.6% q-o-q (AUD 113 per sqm per annum), respectively. Rent growth remains a function of a marketwide lack of available space. In response to elevated demand and inflationary pressures, landlords have been negotiating higher fixed percentages in annual rent review clauses.
  • Investment volumes increased to AUD 441.1 million, after subdued investment levels in 1Q22. Transaction volumes were equally driven by investment sales and development purposes, both accounting for 41% of all transactions. Transaction volumes are anticipated to moderate over the remainder of 2022 as economic uncertainty impacts the market.

Outlook: Yield softening on the horizon for 2022

  • Rental growth is expected to remain the key theme through 2022. Transitory supply chain shortages are proving to be more long term than initially expected, and combined with inflationary pressures and a lack of available supply, upward pressure on rents will likely continue. Landlords have been adjusting their rent review clauses upward, supporting further rental growth.
  • Yield softening is on the horizon for the industrial and logistics industry in Melbourne. Investors still have confidence in the long term macro themes supporting the sector and rental growth, however pricing metrics have changed with the rising cost of debt. Investors are thus expected to become more selective.

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

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