RENTS, LAND VALUES AND DEVELOPMENT IN FOCUS AS INDUSTRIAL MARKET STABILISES

Australia’s industrial property market is shifting gears after five years of record-breaking growth in demand, rents and construction.

Vacancy levels have climbed from historic lows, bringing the sector back into more balanced territory, according to Knight Frank’s latest research, From Surge to Stabilisation.

Vacancy rates normalise

Blended vacancy across the East Coast now sits at 3.2 per cent. While still considered tight, that represents a significant change from the 0.6 per cent recorded in the first quarter of 2023. The post-COVID surge in tenant demand had driven unprecedented leasing take-up and fuelled a wave of new construction, but that momentum has since cooled.

The report suggests that effective rental growth will remain subdued in the short term, although the picture is far from uniform. Vacancy is expected to concentrate in emerging precincts with a large pipeline of new projects, while more established markets are likely to prove resilient.

Diverging rental outlook

Sydney’s South West and Outer South, Melbourne’s North and Brisbane’s South and South West are flagged as more exposed, with lower prospects for rental growth. By contrast, Sydney’s Inner South, Melbourne’s South East and East, and Brisbane’s Trade Coast are expected to deliver stronger outcomes thanks to lower construction and tighter vacancy.

Knight Frank Partner, Research and Consulting, Queensland, Jennelle Wilson, said tenants in some markets will still face higher costs even as more space becomes available.

“It is expected that face rents will be defended with a corresponding increase in incentives to impact effective rents,” she said. “Tenants on leases negotiated prior to 2021 will still face significant rental reversion on renegotiation or relocation, despite having greater choice in the market, to bring them into line with current market rents resulting from significant growth over the boom.”

According to Wilson, prime industrial rents rose by between 30 and 60 per cent on the East Coast over the past three years, underscoring just how intense the recent surge was.

Supply pipeline rebalances

The report found that the supply side will correct relatively quickly, with speculative development slowing and more reliance on pre-commitments. Lower levels of speculative projects and a greater focus on pre-leased space are expected to ease new supply through the second half of 2025 and into 2026.

Wilson said occupiers will continue to look for operational efficiency and upgrades. “Over time, there will be a lift in pre-commitment activity as upgrading and unlocking operational efficiency remains key for large occupiers,” she said. “A more conservative development environment will limit speculative supply in 2026, diverting demand back to pre-commitments to tenants seeking a technology and building fabric upgrade.”

She added that the market would increasingly split between businesses willing to pay for high-efficiency, tech-enabled facilities and those seeking to minimise rental costs, even if it means compromising on optimisation.

Land values remain firm

One of the strongest findings from the research is that serviced industrial land values are expected to hold firm, even as demand eases. Over the past five years, land values across the East Coast have climbed sharply — by 46 to 118 per cent for smaller blocks and 46 to 131 per cent for lots of one to five hectares.

While prices have plateaued recently in Sydney and Melbourne, Wilson said the most significant bottleneck has been the time taken to service land.

“In contrast to building construction timeframes, recent years have proven that the timeline for industrial land servicing and development is the most critical step in the development process,” she said. Lessons from markets such as Western Sydney, and to a lesser extent Brisbane and Melbourne, around the delivery of power and water are expected to continue supporting values.

Looking ahead

The industrial market is settling into a new rhythm. Rental growth will be patchy, depending on location and level of development.

Pre-commitments are expected to dominate new supply, while speculative activity is expected to recede. And despite a cooling in overall tenant demand, the value of well-serviced land is likely to remain robust.

For investors, developers and occupiers alike, the message is clear: the frenzy of the boom years is over, but fundamentals remain strong for quality assets in the right locations.

Australia’s housing crisis will not be solved by first-home buyer incentives or tax changes alone, with leading property figures warning governments must tackle supply constraints if affordability is to improve.

Speaking at the Kanebridge Quarterly Property Leadership Summit in Sydney last week, expert project marketing specialist Sam Elbanna, property investor and fund manager Paul Miron and property consultant Karla McNeice said that a lack of housing supply remained the central issue facing the market.

Elbanna, Director of CPM Realty with more than 30 years’ experience in project sales, argued that successive governments had focused too heavily on stimulating demand rather than addressing the barriers preventing new housing from being delivered.

“The misconception is that politicians think the way to solve the housing crisis is to drive demand,” he said.

“The reality is that’s not the way. This is a supply-side problem, and it needs to be solved on the supply side.”

Drawing on his experience in project sales, Elbanna said policies designed to help first-home buyers often had unintended consequences, pointing to previous grants that ultimately flowed through to higher property prices.

Instead, he said developers were facing increasing red tape, approval delays and rising costs, which were discouraging new housing supply.

“In the absence of stock, demand exceeds supply,” he said.

Miron, a Co-Founder and Fund Manager of Msquared Capital, said the housing debate had become overly focused on tax policy while overlooking broader structural issues.

He argued that affordability challenges stemmed from a combination of factors, including planning constraints, supply shortages, migration levels and interest rates.

“No-one can be 100 per cent certain on the real reason for property prices is going up,” he said.

“The reason why property prices are higher is a combination of interest rates, lack of supply, migration, vacancy rates and maybe taxes play a role.”

Miron was critical of recent federal housing policy changes, warning they could reduce the number of new homes being built and further constrain supply that was even highlighted in the budget.

He also highlighted the importance of the property sector to the broader economy, noting that residential real estate and related industries employed more than one million Australians.

McNeice, who advises developers on sales strategy and market intelligence, said understanding buyers had become increasingly important as affordability pressures intensified.

While affordability remained a major consideration, she said today’s buyers were focused on value rather than simply price.

“People are looking for value for money,” she said.

She said buyers were increasingly evaluating factors such as transport connections, walkability, nearby amenities and flexible living spaces that could accommodate changing family needs.

“What infrastructure is going on? Can I walk to the shops? Can I meet people at the local cafe?” she said.

The panel also discussed the mounting pressures facing developers, with Elbanna arguing that many projects become financially unviable from the moment a site is purchased.

“The viability of a development happens at the moment the site is bought,” he said.

He said rising construction costs, higher interest rates and overly optimistic feasibility assumptions had left some developers exposed as market conditions changed.

While acknowledging the growing number of smaller and first-time developers entering the market, Elbanna said property development required expertise across finance, construction, marketing and legal disciplines.

“It is actually a business that requires a level of expertise,” he said.

Looking ahead, the panel agreed opportunities remained in the market despite current challenges.

Miron said property should continue to be viewed as a long-term investment and cautioned against trying to time short-term market movements.

McNeice said success would increasingly depend on identifying projects that genuinely met changing buyer expectations.

Elbanna said affordable housing remained achievable, but developers needed to deliver more than just homes.

“We can provide affordable housing in this country,” he said.

“But we’ve got to wrap that affordable housing with the things that people want.”

As Australia’s housing affordability debate intensifies, the panellists agreed on one point: without a meaningful increase in housing supply, demand-side measures alone are unlikely to solve the nation’s property challenges.