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News release

Industrial rental growth solid in year to Q3 2011

Despite slower rental growth being recorded in the third quarter, annual increases have been strong across Australian markets

AUSTRALIA, 21 NOVEMBER 2011 – Industrial rental growth weakened across most monitored markets during Q3/2011, but has recorded a strong annual performance.
According to Jones Lang LaSalle’s latest research statistics, rental growth was strong in the year to Q3/2011 due to the limited supply and availability of large prime grade warehouse space.  Average prime grade rents increased by 8.6% in Perth East, 4.8% in Sydney Outer Central West, 4.3% in Brisbane Southern and 1.6% in South Sydney in the year to Q3/2011.
Rental growth for secondary grade stock was solid in the year to Q3/2011, due to the tight supply and low vacancy of prime grade stock to accommodate tenant expansion. In the year to Q3/2011, average secondary grade rents increased 17.5% in Perth East, 6.2% in Melbourne South East, 3.5% in Sydney South, 3.2% in Sydney Outer Central West and 2.8% in Melbourne West.
Australian Head of Industrial, Michael Fenton said demand was stabilising in the Australian industrial sector while supply remains subdued, leading to the slower rental growth in the third quarter.
“Tenant demand was steady in the quarter with recent activity indicating businesses are adopting a more cautious outlook. This is evident in the lack of pre-lease commitments this year compared to the same period last year which witnessed a very high level of activity in the pre-lease and design & construct markets.
“This more cautious behaviour is being driven by global events.  Global economic conditions and financial market volatility has impacted on both business and consumer confidence which may result in softer demand by tenants in the short term,” said Mr Fenton.
During Q3/2011 293,900 square metres of industrial take up was recorded, of which 77% was the leasing of vacant existing space.
“Sydney accounted for 48% of gross take up during Q3/2011. This was driven by several large deals over 10,000 square metres including Costco and OzSale which were confirmed during the quarter.
“Brisbane accounted for 29% of the take up, Perth 11% and Melbourne recorded 10% of national take up. Adelaide had only one major leasing deal over 3,000 square metres, possibly due to a lack of quality existing stock,” said Mr Fenton. 

Director, National Industrial Research at Jones Lang LaSalle, Nick Crothers said, “The slow down in traditional retail spending and indicators for the manufacturing sector could translate to softer demand in the short term by tenants.
“However, back-fill space becoming available from the major tenants moving into their newly constructed purpose built premises over the next year may just provide small and medium size businesses with the expansion space they require,” said Mr Crothers.
Large occupier moves recorded in Q3 2011
Area sqm
Outer North West
OzSale 17,000
Outer Central West
Schenker Australia Pty Ltd
Outer Central West
Amcor Packaging  14,000 
Outer Central West
Quality Logistics Services (QLS)
Outer Central West
Sydney  Outer Central West
Source: Jones Lang LaSalle Research
On the supply side, 333,100 square metres of projects were completed in Q3/2011. About 93% of this has known pre-commitments, indicating little vacancy coming onto the market. A further 382,800 square metres is due to complete in 2011, with only 70% pre-absorbed as of Q3/2011.
“The lower pre-commitment rate for projects under construction reflects the increase in speculative development over the past 12 months. It also reflects the business uncertainty and caution in the last few months. Developers may have been expecting greater leasing success during the construction phase of these projects,” said Mr Fenton.
“We expect developers to monitor the success of current speculative projects, before breaking new ground on further speculative developments,” he concluded.

National Quarterly highlights – Q3 2011:
• Demand stabilised – 293,900 sqm of gross take up was recorded in Q3/2011
• New construction remains subdued – new supply in Q3 2011 was 333,100 sqm
• A further 382,800 is under construction for Q4/2011 delivery
• Rental growth slowed over the quarter. However, rents have grown strongly over the past year.
• There have been 20 major sales recorded totalling AUD 320 million in Q3/2011, around the same level as this period last year.