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 major CBD office markets are recording some of their strongest rental growth since the pandemic, with businesses increasingly prioritising premium office space despite elevated geopolitical and economic uncertainty.

Knight Frank’s Australian Office Indicators Q1 2026 report found net effective rents in Sydney and Melbourne CBDs rose at their fastest annual pace since COVID-19, increasing 10.2 per cent and 6.8 per cent respectively over the 12 months to March.

Brisbane posted the strongest growth nationally, with net effective rents climbing 11.7 per cent over the same period.

The report points to a widening divide between prime CBD office towers and secondary office stock, as occupiers increasingly focus on quality, location and workplace amenity when making leasing decisions.

Knight Frank Senior Economist, Research & Consulting Alistair Read said demand remained heavily concentrated in premium assets within core CBD precincts, helping drive stronger rental growth in top-tier buildings.

“Occupier demand continues to be heavily concentrated in the most desirable CBD precincts and the highest-quality buildings, accelerating a sharp divergence between core and non-core markets,” Mr Read said.

According to the report, Sydney’s Core precinct and Melbourne’s Eastern Core significantly outperformed broader CBD markets over the past year.

“In Sydney’s Core precinct and Melbourne’s Eastern Core, net effective rents surged 14.3% and 16.1% over the past year, significantly outperforming the rest-of-CBD precincts,” Mr Read said.

The rental gap between prime and non-prime office locations has also continued to widen sharply.

“As a result, core CBD rents are now 54% higher than non-core locations in Sydney and 93% higher in Melbourne, highlighting the growing premium placed on amenity, accessibility and workplace quality,” he said.

Knight Frank said the strong rental growth across the major CBDs was being underpinned by a limited supply pipeline, with few new office developments expected to be delivered in the near term.

Mr Read said subdued construction activity was likely to support ongoing rental growth and tighter vacancy rates over the medium term, particularly for premium office towers.

“The combination of sustained demand and declining levels of new development will aid ongoing prime rental growth and lower vacancy rates over the medium term, particularly for best-in-class assets,” he said.

The report noted that current economic conditions were making new office developments increasingly difficult to justify financially.

“Economic rents remain well above expected market rents, making the construction of new office towers largely unviable, and concentrating tenant demand into existing buildings,” Mr Read said.

While suburban office markets generally remained subdued compared with CBDs, Melbourne’s Southbank precinct was identified as a relative outperformer, recording annual net effective rental growth of 2.7 per cent.

The report comes as broader Asia-Pacific office markets continue to stabilise following several years of disruption linked to hybrid work trends, inflation and rising interest rates.

Knight Frank’s separate Asia-Pacific Q1 2026 Office Highlights report found Sydney and Brisbane were among the strongest-performing office rental markets in the region, behind only Bengaluru and Tokyo for annual prime net face rental growth.

The Asia-Pacific report also found 18 of the 24 cities monitored across the region recorded stable or increasing rents in the first quarter of 2026, even as geopolitical uncertainty intensified following escalating conflict in the Middle East.