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Australian vacancy rates falling

Vacancy rates falling

CBRE has revealed in its July 2022 Intelligent Investment report that the Australian industrial and logistics market has the lowest vacancy rate globally, which has resulted in what it describes as a chronic undersupply. MHD found out more from Cameron Grier, Regional Director of Industrial & Logistics and Sass J-Baleh, Head of Industrial & Logistics Research Australia.

It’ll come as no surprise to owner-occupiers and investors that finding a DC or warehouse to rent or buy in several of Australia’s capital cities is harder than ever. 

This is because the Australia’s industrial and logistics vacancy rate is currently 0.8 per cent and is continuing to fall, according to CBRE’s Australia’s Industrial & Logistics Vacancy First Half 2022 (1H22) report.

To put this into perspective, Australia has the lowest national vacancy rate globally, with Sydney having the lowest vacancy rate of any city worldwide, reflecting chronic undersupply across the entire country. 

Net absorption has fallen due to the supply shortage, and rental prices have increased substantially, with the current year-on-year growth rate for super prime grade face rents averaging 13.0 per cent nationally. 

Cameron Grier, CBRE’s Regional Director of Industrial & Logistics, and Sass J-Baleh, Head of Industrial & Logistics Research Australia, have been monitoring these changes. 

VACANCY RATES TIGHTENING

At the halfway mark of the year, we have seen vacancy tighten further around the country as demand continues to outstrip new supply, Cameron says. 

He adds that while CBRE’s Industrial & Logistics team has recently started to witness nervousness from occupiers, with some requirements now delayed or cancelled due to economic headwinds both locally and overseas, CBRE expects demand to continue to outpace supply this year and into 2023. 

“This depth in demand means owners and developers have such choice right now that only occupiers with the strongest covenants are winning the right to secure space, and it’s certainly a tough time if you are a specialised or lower site cover user,” he explains.

“Sydney and Perth remain the tightest held markets in the country and are seeing rental growth above initial forecasts at the start of the year.” 

“Melbourne is getting tighter by the month and Queensland remains the only market where supply and demand is balanced for now. Rapidly increasing construction pricing will put further pressure on rents this year.” 

A healthy level of supply is where the vacancy rate is at around four-and-a-half per cent, J-Baleh says. She adds that the Australian market requires close to 2.5 million sqm per annum of supply to achieve a state of equilibrium, which is 30 per cent above the annual average delivered in the past three years. 

DEALING WITH CHRONIC UNDER SUPPLY

“The real issue is the chronic undersupply,” J-Baleh explains. “That’s what’s characterising the Australian market. This was occurring pre-COVID, too. Prior to 2020, there was a strong push to government to release more zoned and serviced land for industrial use given the level of demand, which has been increasing over the past seven to eight years and has accelerated over the past two to three years, amplified by the pandemic.”

J-Baleh says speculative supply activity in the Australian market is low and currently represents 30 per cent of the total 2022 development pipeline, this is most evident in Perth, where the vacancy rate has dropped considerably in the past 12 months. 

“If you look at Perth, hardly any supply has come online in the past three years, and speculative activity represents around 14 per cent of total development, which is the lowest level in the country. 

“The ability to turn on the tap with respect to supply is lower than any other city, and there has also been an uptick in demand in the past couple of years, like every other market in Australia. The real issue revolves around supply, and therefore the amount of land that’s ready to be developed  in the next 12 to 18 months. 

With demand outstripping supply nationwide, Cameron says vacancy rates will remain low this year, as well as in 2023 and possibly 2024. 

“People need to bring more speculative product to market to deal with supply issues,” he explains. 

“Many institutional groups are looking to bring in build to core product. This is happening along the east coast, especially in Sydney, Melbourne, and Brisbane. It’s probably fair to say that due to planning instruments and many local governments are taking a long time to bring on this land. We believe speculative product will hit the market, but it will take a while.” 

He says the majority of the speculatively built product won’t be multi-storey although there are many of these types of projects in the design stage across Sydney.

A TALE OF THREE CITIES

Brisbane has a lot more supply coming into the market, but there has been considerable demand.. 

Sass notes that there has been limited rental growth in Queensland’s capital city market compared to Sydney and Melbourne, where rents have increased dramatically over the past six months alone. 

“Melbourne has had the highest demand in the country,” she adds. “Similar to Sydney, the Melbourne market has a limited pool of zoned land that is ready to be developed on over the next 12 to 18 months.

“Floorspace take-up rates over the past three years have been the highest in the country. There are a few contributing factors behind this. One of them is that there has been relatively more space these past two years in Melbourne than Sydney, and Melbourne rents are cheaper than Sydney and Brisbane. 

“When Sydney occupiers haven’t been able to expand, they’ve looked to the Melbourne market, but the problem is there is hardly any space now, so take-up activity has reduced significantly this year.

Vacancy rates falling
The Australian market requires close to 2.5 million sqm per annum of supply to achieve a state of equilibrium, which is 30 per cent above the annual average delivered in the past three years.

“Melbourne has the strongest population growth nationwide, on a historic and forecasted basis. It also has the largest port in Australia which naturally drives greater industrial and logistics activity. 

“This is why we’ve also seen massive rental growth because it’s coming off a lower base as well. I wouldn’t be surprised if there’s further scope for rent growth in Melbourne than Sydney.” 

Cameron says Brisbane has had the highest net absorption rate of any state, which has contributed to the vacancy rate falling from 2.3 per cent to 1.3 per cent. He adds that in the last month or so, CBRE has seen Brisbane experience a rental uplift with incentives contracting swiftly as the vacancy rate approaches one per cent.  “I think in the back half of this year, we’ll see more general rental growth in Brisbane, which has been lagging the other states because it’s had higher vacancy, but this is starting to change.”

He notes that while Melbourne is experiencing both face rent and net effective rental growth, Sydney is seeing its rents increase on a month-to-month basis, with prices in some markets rising by nearly five dollars every month. 

“Sydney’s probably the only market where you can genuinely say it’s changing monthly, almost weekly,”  Cameron explains. 

He expects there to be continued pressure on rents for occupiers. “In markets like Sydney, it’s close to 20 per cent rental growth y-o-y, whereas in Melbourne it’s only about 10.3 per cent growth. These are some of the repercussions of the vacancy rates being low. 

“There’ll also be a lot more competition between occupiers who are trying to secure space.” 

FUTURE OF INDUSTRIAL AND LOGISTICS SPACES

Sass says there has been a slowdown in take-up activity, mainly due to lack of floorspace being available to lease. 

“We might see some occupiers potentially reconsider their expansion options due to economic headwinds,” she continues. 

“Many large occupiers are trying to forecast how much space they’ll need given the current rate of demand however, post-12 months, we’ll probably see another uptick in activity.”

Sass says the real issue is how to solve for the medium term, rather than the next 12 to 18 months, because vacancy rates are changing very little. 

She notes even if demand tapers off, there’s still not as much supply despite pre-commitment rates being strong for the next 12-month pipeline. 

“With regards to supply chain disruptions, that won’t change much until the third quarter of 2023. 

“More space and inventory are required. We also expect to see a bifurcation of occupiers, with some unable to afford increasing rents and others planning for the next five to 10 years. 

“Our forecast is that the national rent growth average over the next five years will be about five per cent per annum. 

“Even if more land is zoned and serviced, our share of speculative developments is expected to remain lower than other countries. The US, for example, has over 50 per cent of speculative developments Therefore the risk to supply side shock in the Australian market is low. 

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