Australia's vacancy rate, the lowest globally, shows chronic undersupply

The national average vacancy rate in Australia’s industrial & logistics market continues to be the lowest level globally, with little sign of any “hidden” vacancy despite the current economic headwinds.

CBRE’s H1 2023 Australia’s Industrial and Logistics Vacancy report showed that since the second half of 2019, the national vacancy rate has been trending down, from 6.3% to 0.6%, reflecting a chronic undersupply. At 0.2%, Sydney has the lowest vacancy rate of any city globally.

Sass J-Baleh, CBRE’s Head of Industrial & Logistics Research noted, “We have been closely monitoring the market with respect to hidden vacancy and, given the macroeconomic headwinds, we have noticed some sublease space become available. However, this has not significantly affected the current supply situation at this stage. Australia is the only country in the world with a near-zero vacancy rate, and we do not expect to see the vacancy rate surpass the equilibrium level over the short-to-medium run.”

The report highlights that net absorption continued to trend down across most cities, due to occupier expansion and the lack of space available. Nationally, net absorption reached 1.0 million sqm over H1 2023, concentrated in the Brisbane market, following strong take-up of the close to half a million sqm of new supply added.

CBRE’s Industrial & Logistics Regional Director, Cameron Grier said vacancy was expected to remain extremely tight for the remainder of 2023 but noted that there was a healthy level of supply on the horizon that would start to give occupiers added choice into 2024.

“We are starting to see demand levels across the country fall from historic highs, but our severe undersupply issue so far has completely negated the impacts of reduced enquiry levels. With expectations of economic headwinds ahead in FY23/24, we have just started to see sublease levels increase significantly in Melbourne and Brisbane but have yet to see this in Sydney.”

Ms J-Baleh noted that other major markets around the world continue to record relatively low vacancy levels, however over H2 2022 and H1 2023, there have been slight upward movements in the vacancy for Hong Kong, Canada and the UK.

Sydney:

Vacancy levels continue to be at an all-time low in Sydney due to the lack of available space, with no more than two vacant buildings in the Central Metro and Outer North West regions, with most of the space under offer.

Marginal vacancy movements were seen across the Outer North West and South precincts, while vacancy within the Outer North West precinct further tightened from 0.2% in H2 2022 to 0.1% in H2 2023. The vacancy rate for South Sydney also tightened during this time from 0.7% to 0.5%.

CBRE’s Western Sydney Managing Director Michael O’Neill noted, “New vacancy for the remainder of 2023 is limited, so market fundamentals are in favour of continued rental growth until 2024. However, occupiers are becoming increasingly reluctant to take additional space at new asking rents, which has been compounded by increased outgoings due to land tax and economic uncertainty.”

“There is a significant amount of new existing stock coming online in Q1 – Q2 2024, particularly in the Central and Outer West. Owners are now more willing to offer terms to occupiers for 2024 opportunities given occupiers are less inclined to compete at new asking rentals.”

“Whilst there has been some downward pressure on land rates from the cost of capital and construction, demand remains strong given the shortage of supply and continued rental growth.”

Melbourne:

The Melbourne vacancy rate remains stable at 1.1%, with the East/South East being the only precinct to record a fall in vacancy over the past six months from 2.1% in H2 2022 to 1.2% in H1 2023.

Despite lower lease volumes, occupier activity in Melbourne continues to be amongst the strongest in the country, representing 37% of the national total gross take-up over H1 2023.

CBRE Senior Director David Aiello commented, “The supply pipeline for Melbourne in H2 2023 is expected to total circa 716,000sqm. As at H2 2023, 78% of this new supply has already been pre-committed.”

“We expect the average vacancy rate for Melbourne to remain relatively stable over the balance of the year and rents to escalate given the city’s projected population surge.”

Brisbane:

The Brisbane market has remained relatively stable with the vacancy between H1 2022 and H2 2022 increasing to an average of 0.6%.

Brisbane’s South precinct now has the lowest vacancy rate in the state at 0.3%, tightening from 0.5% in H2 2022. The largest fall in vacancy was within the M1 Corridor, decreasing by four bps over the past six months to be 0.4%.

CBRE State Director Peter Turnbull added, “Demand has slowed over the last couple of months with the majority of the 2023 take-up happening in the first quarter of the year. There are still deals happening, but there is not the same level of urgency.”

“Construction pricing remains high, which is continuing to slow the rate of speculative stock commencing, and we are now starting to see, for the first time, some sub-lease space coming to market, as customers with 3PL begin to reduce their stockpiles and no longer require the space they leased in the pandemic period.”

Perth:

The vacancy rate in Perth has increased to 0.6%, but remains the second lowest in the country. Despite an increase in the vacancy level recorded across all three of Perth’s industrial precincts, vacancy levels remain at sub 1% .

Approximately 30% of the lease transactions in Perth over H1 2023 were due to tenant expansion, with net absorption totaling over 400,000sqm.

CBRE’s Perth Head of Industrial & Logistics Jarrad Grierson commented, “Gross take-up continues to be concentrated in the East precinct at 66%, followed by the South at 30%. Tenant demand has been driven primarily by the transport, postal and warehousing sectors.”

“While the H2 2023 supply pipeline is expected to total circa 100,000sqm, around 65% of this is pre-committed as is 70% of the 2024 pipeline of circa 286,000sqm. ”

Adelaide:

Adelaide’s overall vacancy rate averages sub 1%. The largest decline was recorded in the North precinct, from 1.5% in H2 2022 to 0.0% in H1 2023.

Despite this significant fall, other precincts experienced an uptick in vacancy rate, with the West up 250bps, the South West 230 bps and Outer North 200 bps.

CBRE State Director Jordan Kies commented, “We expect owner-occupiers to continue to be the most active players in Adelaide across both land and vacant posession product.

“Land values are beginning to stabalise after a 24-month period of substantial appreciation. This has shifted some landowners' mentality from spec building towards waiting for pre-commitments. I believe those groups that are willing to spec build the right product will greatly benefit given the low vacancy and continuing occupier flight to quality.”