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Demand For Industrial Space Driving Up Rent

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Demand for industrial space driving up rent.

The latest report from Savills reveals an unprecedented surge in rent for the Australian industrial property market, even as vacancy rates hit an all-time low.

The report found that a solid 18-month period of unmatched demand has caused the east coast markets to grow more than sevenfold compared to their 15-year average.

Savills National Head of Research, Katy Dean, said that this surge in industrial rents is noticeable across all major Australian cities. Prime rents on the east coast have witnessed a nearly 40% increase in the past three years, while secondary rents have shot up by 45%.

Some sub-markets have even seen growth surpass 50%. This substantial rental growth has allowed property owners to profit from market rent reversion and inflation-pegged reviews.

"In the face of a tremendous level of demand in comparison to limited supply, we're not only witnessing an all-time low vacancy but also a substantial level of pre-commitment," Ms Dean said.

According to the report, Real Estate Investment Trusts (REITs) are reporting occupancy rates in the 99-100% range and an 80% or more commitment rate on new projects. This has resulted in a squeezed market with little room for leasing. Savills reports that Sydney and Brisbane are virtually out of availability for spaces over 20,000 square metres.

The combination of low supply and sustained high demand has increased pressure on the sector. The majority of new supply is being pre-committed while construction times are extending due to rising construction costs.

"With all existing space filled and such robust commitment on new projects, it's challenging to anticipate any significant shift in industrial vacancy rates in the short to medium term," Ms Dean said.

Further to this, she said the surge in industrial rents is being felt across Australia’s capitals, but Sydney is feeling it the most. Currently, the harbour city boasts the highest prime net face rents in the nation, having increased by 36.4% over the past year and a further 4.4% in the first quarter of 2023.

Savills National Industrial Head, Michael Wall, said the growth was due to the limited supply of land. "Industrial land prices in Sydney have seen a steep increase over the past two years, with the double-digit growth rates reflecting restrictions on land supply during a time of record-high demand,” Mr Wall said.

"Some pockets, such as the South West and Outer South West corridors, have witnessed some negative growth. However, it's crucial to remember that these prices are still nearly double that of two years ago.”

Melbourne's rental market has also been strong, with rents rising by an average of 16.4% year-on-year and 3.3% growth recorded in the first quarter of 2023. Brisbane saw a 14% year-on-year growth and a 2.8% rise in Q1, while Perth experienced an average annual rise of 15.3% and a 5.3% increase in Q1. Adelaide rents rose by 9.3% over the year, but growth levelled out in Q1 after a 5.2% rise in Q3 2022.

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