MARKET
Unlocking Opportunity: Industrial Momentum Continues
The Sydney Central West and South West industrial property markets remained stable in 2024, with rents and capital values holding steady across both regions. In the Central West, net face rents increased marginally in H2 2024, reflecting ongoing demand for high-quality industrial space, while in the South West, rental growth remained flat, indicating balanced market conditions. Yields across both regions showed slight upward trends as a result of higher interest rates, yet industrial properties continued to attract strong investor interest, particularly from owner-occupiers in the South West. Incentives, ranging from 10 per cent to 15 per cent, remained stable, highlighting the importance of landlord-tenant negotiations in this market.
Looking ahead, tenant and investor demand is expected to remain stable, with softening conditions in broader economic indicators such as consumer confidence and employment having limited immediate impact on the industrial sector. The 2025 pipeline for new industrial development, particularly in Sydney’s South West, suggests a slight uptick in supply, although leasing activity will be closely tied to economic performance and tenant confidence. Despite rising yields, the resilience of both regions’ industrial markets, supported by steady land and capital values, positions these areas as strong performers in the near term.
Industrial Market Indicators
Sydney Central West
Sydney South West
Macroeconomic Update
Inflation
Monthly CPI data measuring the price movements of goods and services over August 2024 revealed a large downward shift in inflation. This was expected given both state and federal government electricity subsidies were reflected in the cost of electricity, and there was also a large expected falls in automotive fuel. The best measure to look at in the data is the trimmed mean, which fell on an annual basis from 3.8 per cent in July 2024 to 3.4 per cent. While still outside the RBA’s target range, it is moving in the right direction and at a consistent pace. Of more concern is continued sticky inflation in the areas of health, insurance, education and new dwelling purchases. Rent inflation is still high, however, indications are that rent increases have stabilized across most of the country. This stabilisation, however, will take some time to be reflected in the ABS’s data.
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Retail Trade
Overall retail trade recorded 0.7 per cent month on month growth over the month of August 2024. This is a rise of 3.1 per cent year on year. While this growth appears solid, it was mostly attributable to a warmer than normal August, encouraging consumers to buy items they usually buy in Spring. Growth in household goods retailing continues to be flat, and is 4 per cent lower than it was in August 2022, despite very substantial population growth over the last two years. Household goods spending usually rises in line with population growth and housing completions, so the lack of growth reflects not just the lack of discretionary spending that consumers have, but also the slowdown in household completions.
Business and Consumer Sentiment
Both business and consumer confidence shifted downwards over the month of August, with consumer confidence remaining deep in negative territory and business confidence falling back into negative territory. Of most concern, both NAB’s Business Survey and Westpac’s Consumer Survey report deterioration in the outlook for the labour force. On the consumer side, employed persons, in particular, are more negative about the outlook for employment, while the business conditions index slid mostly due to a large fall in the employment sub index.
While the unemployment rate is rising at a gentle pace, we are now entering a period where almost all forward indicators of employment conditions are pointing in one direction – and that is to a sustained continued increase in the unemployment rate.
Labour Force
The Australian labour force remained very steady over August 2024, with both the trend and seasonally adjusted unemployment remaining unchanged from the previous month’s release. This is good news for the RBA, who remain hopeful that their monetary policy tightening measures do not lift the unemployment rate beyond their forecasts – which is 4.3 per cent by December 2024 and 4.4 per cent by March 2025, where their position is that it will remain until at least December 2026.
The Australian labour force appears to be in better shape than the US, where revisions to historic data over the past few months have been significant and in the negative. This may be one of the reasons why the US Federal Reserve made the decision overnight for a surprise 0.5 percentage point cut to their cash rate. However, it will be duly noted by both the RBA and the Federal Government that Australia’s economic outcomes have been lagging the US by roughly 6 months over this policy cycle. Therefore, they will be keeping a close eye on any forward guidance that the labour force is about to weaken more than is expected. Thus far though, it can be argued that the RBA is successfully ‘threading the needle’ to a soft landing out of this inflationary period.
Interest Rates
The decision by the Reserve Bank of Australia (RBA) board at their September meeting to leave rates on hold is unsurprising given the relatively steady nature of the most important data points that the bank is watching –those being inflation and labour force. Both measures are performing broadly as the RBA had forecast, and are not currently presenting them with any need to alter their thinking around the timing of the first cut to the cash rate. The most significant change in developments this month was the US Federal Reserve’s somewhat surprising 50bps point cut to the US cash rate.
If the data continues it’s current trajectory of slowly softening, then the RBA is unlikely to change course and the first cut is unlikely to be before the year is out. However, one soft unemployment report could change this thinking quite rapidly.
Impact on Commercial Property Market
A long running inflationary environment has resulted in continuing operational cost increases for most industrial tenants. This means that many tenants are now heavily budget conscious when it comes to rents, resulting in much more muted rental growth. While many tenants would like to upgrade to better quality space, the large cost differential between newly built and existing space means that more tenants than usual are staying put.
Industrial Market Update
Tenant Demand
Tenant demand has been reasonably soft over the last 12 months, however, an impending interest rate cut is providing more confidence for tenants to progress decision making around their premises. Very strong rental growth over the 2021 to 2023 period means that many tenants are already paying at the top end of what is feasible for their business. For that reason, rental growth remains soft, even if demand is reasonable.
Over the year to September 2024, there was very good variety in tenant types for leases signed under 3,000sqm. The transport, postal and warehousing sector accounted for almost 20 per cent of leases signed, Retail trade and Rental, hiring and real estate made up around 18 per cent of leases respectively. Manufacturing made up just over 16 per cent, and ‘other’ tenants over 17 per cent. The proportion of leases signed in the construction sector fell to just over 10 per cent (down from 15 per cent the year prior) due to very soft housing construction activity.
Industrial Leases by Occupier Type - 2024
Leases Less Than 3,000sqm
Source: LJ Hooker Commercial
There was less diversity amongst the larger lessees, with almost 42 per cent of these leases signed by tenants in the transport, postal and warehousing sector. These tenants are typically large logistics firms, and are attracted to the good access to the M5 Motorway and often included ample hardstand for container storage. Demand amongst these tenants is still strong, and it is only a lack of affordable supply that is hampering deal activity. Interestingly, the construction sector was stronger in the larger leases category. Many of these tenants are involved in the manufacture of construction materials, suggesting the trend of ‘on-shoring’ building materials in Australia is continuing.
Industrial Leases by Occupier Type - 2024
Leases Less Than 3,000sqm
Source: LJ Hooker Commercial
Rents
Face rental growth over the last six months has remained flat, as most tenants are highly budget-conscious in the current economic climate. While the next movement in interest rates is widely expected to be a cut, there is considerable uncertainty around the timing and how long it will take for consumer confidence and construction activity to pick up.
In Sydney’s Central West, industrial rents increased in H2 2024, rising from $220-$300/sqm to $240-$300/sqm. This growth reflects ongoing demand for high-quality industrial space and limited supply in the region. In contrast, rents in Sydney’s South West remained stable at $180-$300/sqm throughout both halves of 2024, indicating a balanced market where demand is being met without upward pressure on rents.
Incentives
Incentives are playing a crucial role in deal-making, reflecting broader market conditions. Due to high rental levels, many tenants are negotiating for higher incentives. Vacancy rates are beginning to slowly increase, contributing to a rebalancing of the market. Incentives typically range between 10 per cent and 15 per cent, though some institutional-grade deals are being completed at slightly higher levels, reflecting the motivations of individual landlords. These deals, however, are almost always negotiated at the upper end of the rental range.
In both the Central West and South West industrial markets, incentives remained unchanged at 10 per cent - 15 per cent throughout 2024. This consistency suggests that landlords are maintaining a stable level of tenant support to secure leases. The lack of movement in incentives across both regions indicates that vacancy rates remain manageable, and there is no urgent need for landlords to increase incentives to attract tenants.
Sales Demand
Demand from owner-occupiers in the South West market remains strong, with many cash buyers still active. Although there is some misalignment in pricing between buyers and sellers, appropriately priced properties continue to attract strong interest. Despite this, prices have remained flat, and given the expectation of further yield increases, any pricing growth is unlikely until at least late 2025.
Yields
Yields in the Central West industrial market experienced a slight increase in H2 2024, rising from 4.50 per cent5.75 per cent to 4.75 per cent -5.75 per cent. Similarly, yields in the South West also rose, moving from 4.75 per cent - 5.75 per cent to 5.00 per cent - 5.75 per cent. These upward trends in yields across both regions reflect rising financing costs and interest rate pressures, prompting investors to seek higher returns. However, the industrial sector remains a sought-after investment, with ongoing demand supporting relatively stable yields.
Capital Values
Capital values remained stable in both the Central West and South West industrial markets throughout 2024. In the Central West, capital values held steady at $4,000-$6,000/sqm, while in the South West, values also remained unchanged at $3,000-$5,000/sqm. This stability reflects sustained investor confidence, supported by strong demand and limited new supply. Investors continue to view these industrial markets as resilient, with no significant fluctuations expected in the near term.
Land Values
Land values remained unchanged across both regions in 2024. In the Central West, values remained stable at $1,500-$2,000/sqm, while in the South West, values held firm at $1,600-$2,200/sqm. This reflects steady demand for industrial land, with developers and investors holding firm on pricing despite broader economic uncertainties. The outlook for land values in both regions remains stable, driven by ongoing demand and limited availability of land for industrial development.
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Development Activity
Almost 170,000sqm of space has completed thus far in 2024. This was broadly consistent with completions in 2023, with most space of any significant size being built by large institutions. There is 210,000sqm of space proposed to be completed in 2025, although softer leasing conditions may see this figure ultimately come out lower. Given the increase in upcoming supply, and the high rents required to make the feasibilities of these facilities work, we expect a moderate increase to average incentives.
Source: LJ Hooker Commercial
Supply and Demand Outlook
Investment Demand
Investment demand will remain healthy, with most investors continuing to view industrial property as one of the least risky asset classes in commercial real estate. The shift away from other asset classes persists, although investors are becoming more selective with deals. Yields, which tightened significantly during and after the Covid-19 period, are expected to unwind slightly over the next year. This is already evident in the Sydney Central West and South West industrial markets, where yields rose slightly in the second half of 2024. As interest rates begin to ease, further yield increases are anticipated, reflecting a cautious investment environment where demand for industrial assets remains strong, yet more discerning.
Tenant Demand
Tenant demand is likely to remain subdued for the rest of 2024, although we expect a resurgence in activity by 2025. Signs of growing confidence among tenants are emerging, particularly in Sydney’s Central West, where rents increased in the second half of 2024. This demand is being driven by a preference for high-quality industrial space, though many tenants remain budget-conscious. In contrast, rents in Sydney’s South West remained stable throughout the year, reflecting a balanced market where supply is adequately meeting demand. As we move into 2025, we expect the market to return to more normal conditions, resembling the pre-Covid balance between landlords and tenants.
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Supply
The lack of available supply continues to place pressure on the market, particularly in Sydney’s key industrial regions. Major institutional developers are responding, with several large projects set to complete from 2025 through to 2026. The product being offered to the market is evolving, with multi-storey developments becoming more common due to high land prices in Sydney. Land values remained stable in both the Central West and South West in 2024, holding at $1,500-$2,000/sqm and $1,600-$2,200/sqm, respectively. This suggests ongoing strong demand for industrial land, but with limited available parcels, prices are unlikely to soften in the near term.
Outlook
The overall outlook for Sydney’s Central West and South West industrial markets in 2025 is one of cautious optimism. Investment demand is expected to remain strong, but with a focus on more carefully selected opportunities as yields adjust. Tenant confidence should grow, leading to a balanced market, while the development pipeline promises to alleviate some of the supply pressures, though land prices will likely stay firm due to limited availability. The industrial sector remains resilient, with investor and tenant activity set to pick up as the market normalises post-pandemic.
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