Fitzroys Industrial Market Update and 2024 Outlook

Posted on 20th February 2024

Owner-occupiers emerge as major players in
Victorian industrial market

The drivers that have made industrial and logistics the hottest market in global commercial real estate will continue to create conditions conducive to further rental and capital growth in Melbourne in 2024.

“In recent years, the industrial property market has experienced an unprecedented surge in demand for space. The e-commerce and online shopping booms through COVID turbocharged requirements for inventory warehousing and logistics solutions, and these drivers have been joined more recently by new infrastructure projects and data requirements,” said Fitzroys Director Marco Sandrin, in the Fitzroys Industrial Market Update and 2024 Outlook.

“This demand has forced vacancies down to historic lows, and in an undersupplied market has created very strong rental growth. We’re expecting to see further growth this year. While the rate of rental growth will moderate in 2024, we’re likely to see rises averaging between 3% and 5% across Melbourne’s regions.

“Even after three years of strong rental growth, we’re finding rental costs are still manageable for business and aren’t presenting an impost to tenants committing to new deals.”

“The response has been strong competition between investors and owner-occupiers to acquire industrial and logistics assets, driving up values for assets, from small warehouse units through to institutional-grade facilities. Further asset value growth is expected in 2024. Owner-occupiers have emerged as major players in the market and are driving strong competition in campaigns.

“Melbourne has experienced comparable growth to the pricier Sydney market over the past three years, but Melbourne tends to be more affordable for investment-grade assets. We’re likely to see more major players taking note of this and re-weighting their capital allocation towards Melbourne over the year.

“The same applies to rents, and national businesses will increasingly look to Melbourne for their warehousing and logistics requirements.

“Transport and logistics, e-commerce and manufacturing operators are most active in the leasing market currently.”

Sandrin said yields have eased in line with the increasing cost of debt, however, investors will continue to chase prime industrial investments.

“Industrial and logistics assets continue to be at the top of investors’ wish lists. The sector can expect to see ongoing interest from local and offshore investors looking to take advantage of the historically low vacancy rates across all Melbourne regions that are translating into these strong rents.

Owner-occupiers extremely active in the Victoria market

However, owner-occupiers have surpassed investors in the race for industrial assets in a big way.

“Owner-occupiers are the most active buyers in the market, given the recent uplift in rentals in the past 24 months across the market combined with the scarcity of available zoned land to purchase,” Fitzroys Director Brent Glassford said.

“This buyer profile is securing existing assets in core industrial locations with great access to the current workforce, major road networks and customer base.”

“Vacant properties, and properties with short weighted average lease expiries (WALE)s are attracting heated competition amongst owner-occupiers.”

The prospect of falling interest rates later in the year would result in further buyers entering the market. That has become more likely since the latest Australian Bureau of Statistics data showed that inflation has fallen further, hitting a two-year low.

Further focus on developments

Glassford said major institutions are expected to also continue to focus on acquiring land for development, looking for infill sites in inner suburban locations or large land parcels in the outer suburbs.

“They’re also looking for value-add sites, with short WALEs where the asset can be repositioned, and they’ll be able to capture strong rental uplift,” he said.

Glassford said heavy population growth, fuelled by record migration, will add further to the demand for new developments.

“Strong rent levels and further growth will see major players and developers happy to wear the higher construction costs and look to get new facilities out of the ground. Financing for industrial developments is currently more favourable than other major asset classes.

“We still expect supply to remain tight through 2024, providing strength across the rental market. There will remain an undersupply of property.”

The data boom, fuelled further by the surge of AI and ongoing growth of e-commerce, means further demand for data centres, Glassford said.

“This will bring in more local and overseas-based data centre operators into the Melbourne market looking for development and holding sites to build brand-new, modern centres.”