Logistics dominating industrial leasing activity in Melbourne

But it is also slow-moving, especially in regard to rents which, after a surge in 2016, fell back into a holding pattern, from last year.

Put simply, there is so much industrial zoned land in Melbourne, owned by investors keen to build an income-generating asset that, in many markets, the tenant is king. It was not uncommon for large and vacated warehouses to sit empty for long periods, seeking a new occupier.

This differentiates the sector somewhat from the other commercial markets (in the CBD, some office tenants have been forced to renew, because there is no alternative stock to relocate to. In other cases this year, occupants have been evicted so their offices can be replaced as apartment projects. In shopping centres, retailers are often shifted around at the mercy of their landlords).

This backdrop has created an environment, and risk, whereby developers can be reluctant to build industrial stock (known as speculative development, when a tenant hasn’t pre-committed prior to construction).

Evidenced by supply levels in 2017, which were at their lowest levels since 2013 and also below the five-year average, according to agency Savills Research, the next wave of construction “is likely to be led by tenant pre-commitments and owner-occupier developments with speculative development remaining limited in the near term”.

“However, lower stock levels are likely to provide a boost to rental growth through the reduction of incentives”.

In the 12 months to March 2018, the agency recorded 755,415 square metres of industrial lease activity (counting only deals of more than 1000 square metres). This was a drop of 15 per cent on the previous 12-month term – but still a rise on the 10-year average (706,146 square metres).

Melbourne has five defined industrial areas, ranked in order of lettable area: north, east, west, south east and city fringe.

The west and south east recorded the highest levels of industrial absorption, accounting for 47 per cent and 32 per cent respectively.

Given lease deals struck in the past 12 months, just over two thirds of all industrial space in Melbourne’s west market, is now occupied by ”transport and logistics” businesses: CTI Logistics leasing 15,228 square metres in Truganina, and WWL Logistics renting 9288 square metres in Laverton North.

In fact ”transport and logistics” was the dominant sector in overall industrial leasing activity in Melbourne this year – continuing a trend. According to Savills, 45 per cent of rent deals were signed to this group.

This was followed by ”wholesale” and ”construction, mining and agriculture”, both 17 per cent of the total take up.

Savills Research expects the construction mining and agriculture sector, which has increased the amount of industrial space it has leased throughout Melbourne for two years, is expected to continue to grow “with key infrastructure projects currently under construction or contracted in the state estimated at $10.2 billion, and numerous infrastructure projects still in the pipeline”.

Interestingly, and perhaps indicative of the sophisticated Melbourne industrial market, 69 per cent of leases this year were to large tenants for requirements of more than 10,000 square metres.

Only about a quarter of leases were pre-commitments to new buildings, amongst them the Hickory Group, which signed for 21,733 square metres at 41-55 Leakes Road, Laverton North.

Direct leases accounted for 59 per cent of reported industrial transactions. The northern suburb of Campbellfield saw a major industrial lease for an existing building when Kitchen Innovations committed to a 10,441-square-metre warehouse previously occupied by Dana Automotive, at the National Business Park.