ith tenants remaining cautious, demand for space in the Melbourne industrial market has been relatively soft since 2011.

Although take up levels remain below the historical average, the outlook is more promising with increasing confidence leading to higher pre-lease activity and tenant enquiries.

Driven by speculative construction and backfill options, prime space vacancy is at its highest levels since January 2010. However, prime vacancy levels are likely to ease in the medium term with developers deferring to undertake new speculative development until the current absorption levels rise. In contrast, secondary grade vacancy levels are expected to rise further with tenants increasingly looking to upgrade or expand into prime grade industrial accommodation.

The rising levels of vacant available space have impacted rents, with rental growth relatively static over the past two years. Going forward, prime grade rents are anticipated to remain stable while secondary grade rents to face increased pressure as a result of the increasing secondary vacancy levels.

New supply within the Melbourne industrial market remains constrained, with 2013 marking the lowest annual level since 2000. While new construction is forecast to pick up in 2014, annual new supply will remain below the historical average in the medium term.

In stark contrast to the muted tenant demand, strong investment appetite from all buyer groups resulted in transactional levels year to date increasing to five-year highs. As a result of the imbalance between available modern assets with long leases to blue-chip tenants and growing investor demand, yields have continued to compress.

Several events emerged over 2013 which are likely to impact Melbourne’s industrial for many years to come. Whilst the spate of closures to Australia’s car industry, is unlikely to significantly impact neither the metropolitan office markets nor the residential market, Melbourne’s Northern and CBD Fringe is likely to feel the brunt of the closure of Ford and Toyota’s manufacturing bases.

Between Holden and Toyota they own about 41 hectares in Port Melbourne, while Toyota owns 68 hectares in Altona. In addition, Ford’s sites in Broadmeadows and Geelong span 133 hectares. The closures are likely to result in vacancies and weaken in particular the secondary industrial markets around the three’s manufacturing facilities, where the majority of automotive component suppliers are clustered.

The future of Ford’s Broadmeadows plant is likely to be away from industrial with bulky goods and retail uses a likely outcome given its exposure to the Hume Highway with the majority of current industrial tenants preferring Melbourne’s Western region of Laverton and Truganina.

In contrast, Holden’s 38-hectare plant at Fishermans Bend will likely more than double in value once it is subdivided into smaller portions and becomes better connected to the city by public transport in coming years, which brings us to the second development that is likely to impact Melbourne’s industrial market.

Following the announcement by the Minister for Planning of the 240 hectares Fishermans Bend Urban Renewal Area, which has been declared a site of State significance and rezoned as part of an expanded Capital City Zone, industrial values have significantly risen.

Anecdotal estimates suggest that industrial land values in Port Melbourne have grown by up to 60% since the introduction of the Fishermans Bend Urban Renewal. This rezoning expands the Capital City Zone by more than 50% and is expected to accommodate around 25,000 jobs and 50,000 residents.