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.

Sydney’s residential investment market has recorded $155 million in apartment block and townhouse sales over 2025, underscoring continued investor confidence in rental-led assets despite broader economic uncertainty.

The transactions were completed by Knight Frank’s Investment Sales agents James Masselos and Adam Droubi, who negotiated 19 sales across Sydney during the year.

Residential investments accounted for 75 per cent of their total sales activity, supported by more than 4,200 active purchaser enquiries.

Co-living deal sets national benchmark

Among the standout transactions was the off-market sale of 142 Carillon Avenue in Newtown, a 37-studio co-living apartment block located close to the University of Sydney and Royal Prince Alfred Hospital.

The property sold for $21.5 million, setting a new benchmark for the living sectors market nationally.

The deal achieved approximately $581,000 per bedroom, believed to be one of the highest per-bedroom results recorded for a co-living asset in Australia.

Inner-city assets trade in one line

Other notable sales included a group of 12 townhouses at 108 Illawarra Road in Marrickville, sold in one line for $14 million, and a block of 20 studio apartments at 171 Rowntree Street in Birchgrove, which changed hands for $6.7 million.

Both transactions reflected strong buyer competition for well-located residential assets with established income streams.

Supply constraints underpin momentum

Mr Masselos said Sydney’s apartment block market continued to benefit from tight supply and strong rental conditions.

“Apartment blocks and broader residential investments remain a robust asset class, underpinned by strong rental growth, record low vacancy levels and scarcity of stock,” he said.

He added that more than $25 million worth of residential investment opportunities are expected to come to market in 2026, with buyer enquiry remaining elevated.

Mr Droubi said competitive sales campaigns had become a feature of the market as investors sought secure income and long-term value.

“Supply constraints and ongoing population growth underpin market strength,” he said. “New approvals and completions lag demand, keeping stock tight and boosting both rents and prices.”

Vacancy rates keep pressure on rents

According to Knight Frank, rental demand across Sydney remains intense, with vacancy rates well below typical “healthy” levels.

Many middle and outer-ring suburbs are recording vacancies of around 1.5 per cent or lower, maintaining upward pressure on rents and reinforcing the appeal of residential investment assets.