When will industrial rental growth slow down?
Businesses squeezed by major rental hikes are exploring new lease strategies
Ongoing growth was the overarching assessment of Australian industrial real estate made by JLL in the first quarter of 2023. With vacancy rates at record lows, tenant demand remaining consistent and landlords pushing up rents in response to increased capitalisation rates, the recipe for growth has been ever present across 2022 and 2023.
However, as we progress into the second quarter of 2023 there are signs of this growth slowing, and it’s presenting minor relief for occupiers. Some of the drivers and indicators of this emerging shift include:
Increasing angst amongst occupiers around substantial rent increases, particularly in Sydney. Reaching their limits, businesses are either refusing to accept the increases, or are taking drastic action such as moving interstate.
Since the pandemic, there has been no sublease space available in the major markets, but that is slowly changing. We believe this will help stabilise the market, finally providing options for tenant relocation.
The number tenants whose businesses have collapsed has increased significantly in 2023. The tenants range from small private businesses in standalone warehouses to recognisable names such as Scott’s Refrigerated Logistics.
These market developments are in their very early days. Until they become substantial, tenants continue to face the consequences of the industrial sector’s exponential growth. However, some are finding ways to alleviate the impact.
What we’re increasingly seeing is tenants aligning their lease terms, lease structures, and general terms with market conditions.
For example, in the current market of declining incentives, there are few benefits to tenants of committing to long-term lease contracts. If market conditions point towards softening conditions or increasing warehouse supply, a short-term lease gives tenants the flexibility to opt into new contracts sooner as the environment becomes occupier friendly.
With tenants facing rent increases of 100% in some cases due to the market reviews written into their contracts, it pays to explore all the options.
If you would like to discuss your lease requirements or understand the alternate strategies available, please contact the JLL occupier team.