Key industrial precincts in supply deficit in 2024

Fourteen of 22 key industrial precincts are in supply deficit nationally, with four broadly balanced and only a few showing signs of oversupply, according to JLL’s Australian Logistics & Industrial Investment Review and Outlook 2024 Report.

JLL’s Head of Strategic Research – Australia, Annabel McFarlane, said the remarkably strong industrial market fundamentals – GDP and population growth, increasing e-commerce demand and limited space availability and strong rental growth – has driven a buoyant response from developers in the supply of industrial warehouse space.

She said that although supply was building, with incentives having kicked in early last year, available warehouse space remained low, and most precincts were still in a supply deficit.

“The industrial development market is playing catch up following significantly above average occupier demand in 2021 and 2022. The supply response was strong in 2022 but moderated in 2023, as construction and debt costs increased. Our analysis, which considers average annual take up compared to volumes of under construction projects, suggests additional development capacity, with industrial precincts likely to be undersupplied rather than oversupplied in 2024.”

“Key industrial precincts, including Melbourne’s south-east, Sydney’s outer south-west and inner west, and Brisbane’s Southern are in a supply deficit, the latter despite a record amount of space being delivered across Brisbane in 2023,” Ms McFarlane said.

She said that while there was some risk of oversupply in South Sydney and Melbourne’s north precincts, demand in those areas had accelerated with sites under construction carrying healthy levels of pre-commitment, which would keep the risk of vacancy in check. Developers are likely to postpone construction starts until an occupier is secured in these markets.

The ‘Australian Logistics & Industrial Investment Review and Outlook 2024’ report revealed gross take-up of industrial space totalled 2.5 million sqm nationally in 2023, slightly above the 15-year annual average of 2.4 million sqm but below 2022 (3.4 million sqm) and 2021 (4.3 million sqm).

Brisbane posted a record 642,000 sqm delivered in a single year, more than double the annual supply average of the last 15 years (305,800 sqm). Seventy per cent of projects, by volume, that were completed in 2023 were absorbed at practical completion, while 69 per cent of stock due for completion in 2024 (circa 450,000 sqm) has already been absorbed, the report noted.

Ms McFarlane said 2024 was shaping to have a similarly large volume of stock delivery in Brisbane and elsewhere, with a national supply pipeline of 2.4 million square metres under construction with a pre-commitment rate of 52 per cent.

She said projects were focused mainly on eastern seaboard markets with warehouse space currently under construction split between Sydney (672,000 sqm), Melbourne (995,000 sqm) and Brisbane (611,000 sqm).

The report found Australia’s five-year GDP outlook was projected to average 4.7 per cent annually while, based on population growth over the next five years, Australia would need around 7.4 million square metres of new supply to match demand.

E-commerce activity has normalised, but continues to grow and is also driving demand, with online retail sales rising to $55.8 billion in January 2024 translating to online retail penetration of 13.1 per cent, well up on the pre-pandemic reading of 9.3 per cent in December 2019 but still behind China (47%), the UK (30.6%), the US (15.8%), and Japan (13.7%).

JLL’s Head of Logistics and Industrial – Australia, Peter Blade said robust rental growth, on the back of super-charged occupier demand and limited supply, had been a key driver of construction with double-digit growth over the last 12 months ranging from 37.4% in Sydney South and 15% to 25% y-y in other Sydney and Melbourne markets in 2023.

“There is no doubt rental growth has been an important incentive for developers to dust off their plans, but it has also been important for investors as it has created strong positive rental reversionary potential in many markets,” he said.

“Given the pattern of rental growth over the last three years, we assess that occupiers could be faced with rental uplifts of 30 to 60 per cent at lease expiry, depending on the market.

“On the positive side for occupiers, a more neutral economic outlook in 2024 is giving confidence to many groups that were delaying decisions on space requirements as rents accelerated. Tenant organisations are being far more strategic and securing preleases in new developments. The backfill churn created by new supply will provide tenants with increasing choice so strong rental growth is likely to give way to more moderate rental growth throughout the year. At the same time, we are likely to see divergence in performance between prime and secondary-grade assets and increasing focus on sustainability features in buildings,” Mr Blade said.

JLL Head of Logistics and Industrial Capital Markets - Australia, Ben Hegerty said Australia’s investment market remained challenged by pricing uncertainty amid a period of rapid funding cost changes. However, industrial sector transaction volumes demonstrated a remarkable resilience.

“Investor demand for logistics and industrial assets exceeded office sector volumes for the second time in 15 years, with industrial representing 34 per cent of total activity in 2023, up from 29 per cent in 2022.

“As financial uncertainty stabilises through 2024, industrial cap rates are expected to rebound. We are observing a huge wave of capital searching for L&I product, driven by increased understanding of the long term structural tail winds driving growth in the sector and with forecast stability in debt markets. With returning competitive tension and narrowing of ‘bid to ask’ spreads, we are likely to see even higher levels of transaction volumes in 2024 and beyond,” said Mr Hegerty.

JLL’s report found the logistics and industrial sector recorded $6.2 billion in direct property transaction volumes in 2023, slightly ahead of the 15-year average of $5.7 billion. It found that since the trough in values in 2009, industrial asset values had nearly tripled, increasing by 288 per cent.

The report also forecast industrial market yields, which averaged 5.63 per cent in the fourth quarter of 2023, would increase by another 25 basis points through 2024 before compressing to stabilise between 5.4 and 5.75 per cent for most of the decade.