10 Occupier demand for industrial property in Melbourne is expected to remain strong over the next 6 to 12 months, before pandemic related drivers dissipate. Besides these drivers, the outlook for industrial demand will also be influenced by economic growth nationally and in Victoria, both of which are facing near term headwinds as interest rates rise and consumer spending tapers. Demand for industrial space will continue to be influenced by the structural shift to servicing e-commerce. However, the extraordinary pace of growth that was heightened by the pandemic has already slowed and is likely to slow further as people balance spending on goods back towards services. Food retail spending has settled since the pandemic boosted spikes in 2020 and early 2022 but remains an important demand driver. Going forward, growth in this sector to more closely mirror population growth. Furthermore, we do not think that industrial property occupiers’ propensity to carry additional storage space for higher inventory levels will persist long term. Our assessment is that supply chain disruptions are likely to linger for a little while yet but then should normalise. Beyond this point, the costs associated with carrying extra storage space will trigger a rationalisation, but not to the point of returning to pre-COVID operating methods. The pattern of the drivers outlined above suggest the take-up of industrial property over the first half of 2023 will remain robust. We forecast net absorption of 810,000 square metres for the 2023 financial year, before falling back to around 600,000 square metres in the 2024 financial year. Given a strong profile for demand, low vacancy rates and rising pre-lease rents, that prime rents will grow circa 15% to 27% pa across the regions in the 2023 and 2024 financial years. Low vacancies in secondary market are supportive of c 20% pa growth rates across the same period. Rises in long bond rates last year means property yields are showing signs of softening, removing a key suppresser of pre-lease rents (and in turn market rents). Higher land values, construction costs and a forecast phase of yield softening all point to higher rents needed for pre-leases. Leasing outlook Melbourne South-East region industrial rents and capital values 600 1,000 1,400 1,800 2,200 2,600 3,000 3,400 3,800 70 80 90 100 110 120 130 140 150 160 170 180 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 $/psm $/psm Forecast Values (Right axis) Net stated rents (Left axis) Industrial Market Monitor | 1st Half 2023
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