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Melbourne's industrial vacancy reaches near five-year high

Industrial vacancy in Melbourne has reached a near five-year high as the wave of speculative development chasing new tenants creates a backlog of unfilled space, research shows.

The number of sheds and yards sitting empty was 38 per cent above long-term averages, with 807,269 square metres of space vacant at the end of June, agents Knight Frank report.

The bulk of empty infrastructure was concentrated in Melbourne’s west (37 per cent), followed by the northern suburbs (33 per cent), south-east (18 per cent) and east (10 per cent). 

A relatively minor 6800 square metres was available in one building in the city’s fringe, the Melbourne Industrial Vacancy July 2014  report which tracks vacant space larger than 5000 sqm shows.

‘‘Over the [June] quarter, backfill space has grown by 50 per cent, while total speculative development is now 29 per cent above its long-term average,’’ the report said.

Four of the seven speculative projects currently under construction were in Melbourne’s south-east, but there were none in the west, Knight Frank’s Gab Pascuzzi said.


Vacancies have risen since October 2012 with backfill space now accounting for 84 per cent of that stock, he said.

Colliers International’s Tony Iuliano said the rate of speculative development was slowing and the pre-lease market - where developers build to order - was ‘‘starting to crank up again.’’

‘‘It’s reverting back to what it was two or three years ago,’’ Mr Iuliano said. ‘‘Your typical vacancy that’s available will start to be absorbed because there’s a lack of new development coming out of the ground.’’

Colliers recently sealed a lease with Reece Plumbing for 24,000 sqm in Dexus Property Group’s Dandenong South facility, touted as the largest industrial deal for an existing A-grade building in the south-east market in three years.

A slew of proposed infrastructure developments will help underpin growth in the city’s industrial market, according to CBRE’s 2014 Industrial MarketView Q2 report.

If it goes ahead, the East-West Link will lift demand for industrial space in Melbourne’s West, CBRE’s Dean Hunt said.

Victoria had the second highest sales turnover after Sydney over the quarter. 

‘‘In the three months to June 30, $188.3 million in industrial property changed hands across Melbourne, the highest Q2 figure since 2011,’’ the report said.

The largest individual transaction was the sale of 251 & 261 Salmon Street for $28.25 million representing an initial yield of 8.31 per cent and WALE of 5.5 years.

CBRE’s Chris O’Brien said while there was strong demand for secure super prime industrial investments, there was growing appetite for those with more risk.

“Given the progressive compression in prime/super prime yields, we are finding an increasing appetite for non-core industrial assets with leasing risk/value-add attributes. This has been a strategy for investors to increase their portfolio platform, or in fact, enter the market,” Mr O’Brien said.

Tenant demand was likely to improve over the remainder of this year with the bulk of leasing enquiry targeting space between 5000 and 10,000 sqm primarily in the warehousing and logistics sectors, Knight Frank said.

But the number of speculative projects set to be completed and tenants’ preference for prime space would continue to depress asking rents, particularly for secondary stock, it said.