Q3 2020 – Melbourne Industrial Market

  • Sales activity of the Melbourne industrial market in 2020 is on course to record the fourth largest annual transactional volume;
  • Melbourne industrial market is projected to record its largest year of new supply with 850,000sqm of new industrial stock projected to be delivered in 2020;
  • Vacant industrial space across the Melbourne market has increased through 2020, having now risen to its highest level since 2017.

The ongoing structural changes which have resulted from the pandemic have demonstrated the critical need and reliance for industrial and logistics facilities. eCommerce trade has grown by approximately $7 billion in 2020 and now accounts for 11% of all retail trade. In contrast to other sectors, leasing activity remains above the long-term average as occupiers continue to invest in their supply-chain operations.

Sales Volume/Yields

While the growth of e-commerce has boosted investor demand for industrial property, the impact of the pandemic has only reinforced the structural shift of consumer purchasing patterns. This strong investor demand has led to yields of Melbourne industrial property continuing to compress. Prime Melbourne industrial yields have once again fallen to historical lows with prime yields ranging between 4.50% and 5.00%. While secondary Melbourne industrial yields have also declined in recent years, over the 12 months to September 2020, the secondary yield range has remained stable at 5.75% and 6.50%.

Urban Property Australia has recorded $990 million of Melbourne industrial sales in 2020 to date, already in-line with the 10-year average. Sales activity of the Melbourne industrial market in 2020 is on course to record the fourth largest annual transactional volume. The majority of sales this year were recorded in the West with domestic institutions (AREITs, superannuation funds and unlisted funds) acquiring for 42% of all industrial sales. While sale volume was boosted by a number of major sales, Urban Property Australia research revealed that 65% of industrial properties sold in 2020 to date transacted below $25 million.

Melbourne Industrial Sales & Prime Yields

New Supply/Land Values

Boosted by a surge of pre-commitment activity, the Melbourne industrial market is projected to record its largest year of new supply. With already 550,000sqm completed, Urban Property Australia forecasts that 850,000sqm of new industrial stock will be delivered across the Melbourne market by the end of this year. The bulk of the new stock expected to be completed this year is located in the Western sub-region, followed by the North. Despite solid tenant demand for additional stock, the South East remains restricted by declining land supply, resulting in its share of new supply falling from historical levels. Looking ahead, Urban Property Australia forecasts that new supply for the Melbourne industrial market next year will remain above average with already 475,000sqm currently under construction and scheduled for completion in 2021.

Although industrial land values have grown through 2020 to date, the appreciation of growth over the past three months has slowed. This easing rate of growth for industrial land values reflects that there are fewer developers seeking to increase their land holdings in the midst of economic uncertainty. Having grown solidly since 2017, Urban Property Australia recorded additional annual land value growth of 7% in the Western region, with the values increasing by 5% in the South East and 4% in the North over the year to September 2020.

Melbourne Industrial Construction Activity

Tenant Demand

Despite the adverse economic impacts of the lockdown in Melbourne, industrial leasing activity in 2020 to date remains above the 10-year average. Leasing activity was led by the West, followed by the South East and North with only minimal activity recorded in the City Fringe precinct. Urban Property Australia research revealed that logistic & transport companies accounted for 35% of all leasing activity over the year to September 2020 followed by retail trade occupiers (30%) and food & beverage manufacturers (20%). Industrial demand has been underpinned by occupiers that operate in the non-discretionary consumer goods sector highlighted by the recent commitments of Coles, Linfox, Woolworths and DHL.

Vacancy/Rents

Vacant industrial space across the Melbourne market has increased through 2020, having now risen to its highest level since 2017. Vacant industrial stock increased in both prime and secondary buildings with the bulk of the increase of vacancy resulting from occupiers moving into pre-committed new developments. Urban Property Australia research estimates that Melbourne industrial vacancy rate currently stands at 7% as at September 2020.

Melbourne prime industrial rents have remained stable through 2020 to date with little transactional evidence negotiated during the pandemic. Whilst it remains difficult to ascertain the impact of the pandemic on rental levels for the Melbourne industrial sector, Melbourne’s population base and infrastructure investment should continue to support rental growth in the medium term for Melbourne industrial property.

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