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While Q3 warehouse rental growth remains elevated, new data reveals that growth rates are beginning to return to pre-pandemic levels.
The global COVID-19 pandemic spurred an intense cycle of rock-bottom vacancies, substantial capital investment and double-digit rental growth in Australia’s major industrial property market.
But according to new research by Savills Australia, there are hints that this unusual growth is starting to settle.
At its peak in Q2 2022, Australia’s five core industrial markets – Sydney West, Melbourne West, Brisbane Southside, Perth Core and Adelaide’s Inner West – averaged over 7.2 per cent, Savills Australia’s head of research, Katy Dean, noted.
“While rental growth remains elevated compared to the historical annual average of 2.7 per cent, it has now slowed to just over 1 per cent, which is its lowest level in two years,” said Ms Dean.
The head of research shared that average prime net face rents remain 50 per cent higher than pre-pandemic levels, but insisted that the slowdown “is a clear indicator that the strong rental growth cycle is over”.
“We are not seeing available space flood the market, but we are starting to see some signs that the pace of activity is gradually decelerating,” she clarified.
Nevertheless, Savills emphasised that normalisation of industrial rental rates would not happen overnight.
“Rental growth has outpaced inflation and with indexation levels now forecast to remain elevated, the path to normalisation may take some time to pass through, especially given the still low vacancy rate and delays to leasing activity to 2024,” said Ms Dean.
Low vacancy rates still persist, and Australia’s major industrial markets continue to experience a severe land shortage, according to Savills.
“Some markets still face a critical undersupply of land,” reported Ms Dean.
She forecast that “delays to spec project starts coupled with prolonged decision-making will increase competition for space when the economy stabilises in 2024”.
On the investment front, activity in the industrial sector also has some way to go before it fully returns to its pre-pandemic average levels.
Savills reported that industrial investment has gone down 24 per cent from last year’s levels, but stressed that there are still no signs of significant distress in the industrial sector.
While ongoing price discovery may have led some investors to redeploy capital, Ms Dean stated that rental growth has offset any capital value decline.
High interest rates, elevated inflation, prolonged decision-making and demographic tends are all expected to continue to impact industrial investment activity well into 2024, according to Savills.
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