Sydney to see the highest industrial stock levels since 2018

Industrial stock is expected to reach a total of 571,100 sqm this year.

Occupier activity in the Sydney market was above the 10-year quarterly average for the fourth consecutive quarter in 1Q21 according to JLL, with gross take-up totalling 313,100 sqm. This was the highest recorded total for Sydney since the record-breaking quarter in 2Q20, and exceeded the long-term average (202,700 sqm) by 55%.

Gross take-up was again led by the retail trade sector, which continued to demonstrate the significant impact that increasing e-commerce adoption is having on industrial markets. The sector accounted for 41% of demand in the quarter, followed by the postal, transport and warehousing (32%) and wholesale trade (10%) sectors.

Here’s more from JLL:

Asset delivery falls due to declining speculative development

Only three assets reached practical completion in the Sydney industrial market in the quarter, totalling 31,800 sqm – 70% below the 10-year quarterly average of 106,500 sqm. Completions were heavily weighted to the Outer North West precinct, which accounted for 71% of completed floorspace, while the balance was delivered in the Outer Central West precinct.

There was no speculative space delivered in the quarter, as all three assets that completed were fully pre-committed prior to completion. This is the first time this has happened in Sydney since 2Q18 and is reflective of the substantial decline in speculative development that occurred at the peak of the COVID-19 pandemic in the middle of 2020.

Declining asset availability continues to drive rental growth

Below-average asset delivery and elevated occupier activity is driving down vacancy in the Sydney industrial market, which, combined with rapidly growing land values, is placing pressure on rental rates. Average prime net face rents grew by 0.3% over the quarter, to AUD 158 per sqm per annum, an increase of 1.8% over the last 12 months – the highest of any market in Australia.

Transaction volumes recovered from subdued results at the end of 2020 to total AUD 653.5 million – 41% higher than the 10-year quarterly average. Notably, only 15% were investment sales, demonstrating the relative lack of income-producing assets that are being offered in Sydney. As such, we have recorded further yield compression – by 23 bps to a market-average midpoint of 4.57%.

Outlook: Owners to benefit from ongoing occupier and investor demand

While the circumstances surrounding the pandemic are expected to remain relatively fluid throughout 2021, structural tailwinds and improving confidence are likely to continue to encourage activity. Given its place as Australia’s largest city, Sydney is expected to be a sought after location for occupiers and investors, which will create significant competition in the leasing and capital markets.

Despite the relatively low supply delivered to the Sydney market in the quarter, there is scope for an acceleration of asset completions over the rest of 2021. There is currently 539,300 sqm of stock either under construction or with approved plans and due to complete in the next nine months, bringing the full year total to 571,100 sqm – the highest since 2018.

Note: Sydney Industrial refers to Sydney's industrial market (all grades).