Industrial vacancy rate rises for first time in five years
Industrial vacancy rates rose for the first time in five years in the second half of 2023 and are expected to climb higher in 2024 due to a combination of weaker demand and more warehouse supply coming online in most markets, according to a report by CBRE.
The average national vacancy rate rose to 1.1 per cent, from 0.6 per cent over the first half of the year. Rents are likely to rise in 2024, albeit at a much more moderate pace, providing some relief to tenants who have endured cumulative rental increases of close to 40 per cent over the last two years.
The last time the national industrial vacancy rate rose was in 2018, before the acceleration of e-commerce fuelled by the pandemic sent demand for warehouse space soaring and vacancy rates tumbling in capital cities. From the second half of 2019 to June this year, average industrial vacancy rates fell from 6.3 per cent to 0.6 per cent.
Alongside the tightening of vacancy rates, prime industrial rents have surged as occupiers have competed for limited available space close to urban centres.
More warehouse space will be available for lease in 2024.
Some space is being freed as retailers, wholesalers, manufacturers and logistics firms scale back their expansion plans amid weakening consumer spending and as more speculative warehouse developments are completed. Rental growth is expected to be capped at just over 4 per cent in key Sydney and Melbourne markets, and be largely flat in Brisbane, Adelaide and Perth in 2024.
CBRE’s industrial and logistics regional director, Cameron Grier, said he expected 2024 to look “largely different” from 2023 and the pandemic years.
“As we head into the new year, we will see more supply come online, which is a mixture of speculatively built stock, existing vacancy and sub-lease,” he said.
“Occupiers will finally start having some choice in 2024.”
Mr Grier said it was important to note that despite this increased supply, most markets would remain well below historical vacancy levels.
While vacancy rates will rise further in 2024, they are not expected to reach the equilibrium setting of 4 per cent – where demand and supply are in balance – over the next two years, according to CBRE.
And while vacancy rates rose in all major markets in the second half of 2023, Sydney (up to 0.5 per cent, from 0.2 per cent) still holds the mantle of the lowest vacancy rate of any major city around the world, with Melbourne at 1.6 per cent (up from 1.1 per cent). Brisbane’s vacancy rate more than doubled to 1.4 per cent.
Jesse Curtis, fund manager of ASX-listed Centuria Industrial REIT, agreed with an observation from CBRE’s head of industrial research, Sass J-Baleh, that a bifurcation of rental growth based on location would occur in 2024.
Mr Curtis said last mile, urban infill locations would remain the most sought after, with more supply and hence weaker rental growth occurring in outer metropolitan and regional markets
“Last mile locations continue to be sought after as a significant proportion of tenants prefer to be closer to densely populated areas, which enables more efficient supply chain logistics and provide quicker delivery of goods to consumers,” he said.
Highlighting this trend, the Centuria fund, which has more than 83 per cent of its $3.8 billion portfolio situated within urban infill, last mile locations, reported average re-leasing spreads of 48 per cent in the second half of the 2023 financial year.
Ms J-Baleh said prime warehouse space was still being leased at strong rental rates.
“We do not anticipate demand for good quality assets in core locations to drop. Rather, vacancy is expected to rise in secondary locations,” she said.
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