Melbourne & Sydney industrial rental gap widens to 90%

Sydney, October 24, 2017– Relief could be in sight for Sydney’s industrial & logistics market, as a constrained supply pipeline and surging rents over the past five years spark a new wave of development across the city.

A new CBRE Viewpoint – Why pay Sydney rents – highlights the increasing gap between rents in Australia’s two largest industrial & logistics markets, with Sydney super prime rents widening from a 40% premium on Melbourne rents in 2012 to almost 90% in 2017.

Rental contrasts in the two cities over the past five years can be partly attributed to differing land availability. Since 2014, Melbourne has seen two million square metres of warehouse space added to the market, whereas in Sydney, the pipeline was 20% lower, despite having a larger demand base.

In Melbourne, the strong growth of industrial supply has outstripped demand, placing downward pressure on rents and causing incentives to grow from 7.5% in 2012 to 25% in 2017.

CBRE Research Analyst James Melville said the the high spreads between the two markets was not sustainable, with relief in sight for Sydney over the coming years.

“The higher rents in Sydney will encourage further development of industrial stock and, eventually, see the rent spread diminish,” Mr Melville said.

“The ground has already broken on the Moorebank Intermodal Terminal, with the supply pipeline already 60% higher in 2018 compared to 2017.”

However, with rents around 90% lower in Melbourne, it held significant appeal for industrial occupiers, Mr Melville said.

“With the rent spread increasing, Melbourne is an attractive location for industrial occupiers, offering excellent access to international and interstate freight gateways,” Mr Melville said.

“While Sydney is larger, these cities are not drastically different, however for occupiers considering relocation, the potential savings in rent and operating costs are overshadowed by the significant relocation costs.”

The report highlights the premium cost of industrial land in Sydney, commanding roughly double the price of that in Melbourne, where it is also more readily available.

While there is no significant shortage of industrial development sites in Sydney, Mr Melville said much of the stock was held by institutional investors and large private owners.

“They have been hesitant to develop these holdings as Sydney’s west is rapidly changing and the long-term commitment may result in foregoing attractive future opportunities,” Mr Melville added.

CBRE Regional Director, Industrail & Logistics, Jason Edge said Sydney’s industrial landscape would evolve significantly over the next five years with the growing need for land to be rezoned and serviced to cater for the increasing demand from investors and occupiers.

“Whilst there are obvious rental savings when you look at Melbourne versus Sydney, Sydney continues to attract a strong national and international occupier profile. The need to be closer to the end consumer has never been more important and will only be more critical as customers’ buying habits continue to change,” Mr Edge said.

“Land supply within western Sydney will remain constrained with almost no land for owner occupiers or developers available to purchase. This is likely to be the case until the Western Sydney Employment Area is rezoned and the necessary services are made available which is still somewhat unknown.”

Read CBRE’s full reasearch here.


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