53 Over the next 12 to 18 months, a handful of key drivers (that were significantly shaped by the pandemic) will remain dominant drivers of industrial property demand in Sydney. Growth in online retail spending will continue to have a strong influence on industrial property demand in Sydney and will continue to encourage ongoing investment from industrial occupiers in more efficient warehousing and delivery services to satisfy their customers. We do not anticipate that the build-up of domestic inventory seen during the pandemic will be enduring once supply chains normalise, as this inventory management strategy carries a 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 700,000 square metres this calendar and next financial year, sustained by the release of pent-up demand as completions ramp up. Thereafter, as pandemic related drivers ease, we forecast net absorption to moderate to a still healthy 500,000 square metres in the 2024 financial year. Strong demand, lower vacancy and rising pre-lease rents are set to drive elevated rental growth in the near term. We forecast annual growth rates of 12 per cent to 17 per cent across the Central West and Outer West in the 2023 and 2024 financial years, whilst the Northern and Southern regions are anticipated to experience moderately higher rental growth. Contained vacancies in the South and Central West are also supportive of 10 per cent to 18 per cent annual growth rates in the secondary market. Recent rises in long 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). Hence, rising land values, construction costs and a forecast phase of yield softening all point to higher rents needed to make new builds feasible. Leasing incentives are also forecast to fall a little further by the end of this year, reflecting very tight market conditions, and driving exceptionally strong growth in effective rents. Leasing outlook Sydney outer western industrial rents and capital values Industrial Market Monitor | 2nd Half 2022
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