Medium-to-long term, we expect the connection between growth in the economy (as measured by SFD) and demand for industrial property to re-establish itself. Over the next 12 to 18 months however, a handful of key drivers (that were significantly shaped by the pandemic) will remain dominant drivers of industrial property demand in Melbourne. First is growth in online retail spending. After growing at over 35 per cent in the 2021 financial year, we estimate national domestic online retail sales growth increased by 15 per cent in the 2022 financial year and then should normalise at closer to 10 per cent in the 2023 financial year. Victoria will capture a share of this growth, encouraging ongoing investment from industrial property occupants in more efficient warehousing and delivery services to satisfy their customers. The easing back in online spending will be shaped by consumers rebalancing their pandemic influenced spending back from goods to services. Second is investment decisions triggered by the surge in food retailing in 2020 (driving demand for cold and room temperature storage). We estimate food retailing in Victoria rose by over 5 per cent in 2020 but eased back to circa 3 per cent in the 2022 financial year. Looking forward, we expect growth to normalise as population growth resumes. Thirdly, we forecast a strong rebound in economic growth in Victoria this year and next as the state reopens, flowing through to stronger than normal demand for industrial property space. Finally, we do not expect the build-up of domestic inventory will be enduring once supply chains normalise, because of the higher cost to businesses. It is hard to say with confidence when higher stock-to-sales ratios will unwind, but our forecasts allow for supply chain pressure to ease by next year. Even so, we do not expect a return to pre-pandemic ‘just in time’ inventory practices. Combining the drivers of demand, indicatively, we forecast net absorption to remain above 1 million square metres this year, before easing back to 830,000 square metres for the 2023 financial year and then an average of 600,000 square metres pa in the 2024 financial year. Given a strong profile for demand, low vacancy rates and rising pre-lease rents, we expect that prime rents will grow circa 13 to 14 per cent pa across the regions in the 2023 financial year and the 2024 financial year. Recent sharp rises in long term bond rates means that we no longer believe yields will continue to firm, removing a key suppresser of pre-lease rents (and in turn market rents). As a result, rising land values, construction costs and a forecast phase of yield softening all point to much higher rents needed to make new builds feasible. Leasing incentives are also forecast to fall at a steady pace to mid-2023, reflecting very tight market conditions, and driving exceptionally strong growth in effective rents. Leasing outlook 1 1 Melbourne South East Industrial rents and capital values Industrial Market Monitor | 2nd Half 2022
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