Melbourne industrial yields to hit a new midpoint record low by Q4 2021

Strong investor demand is causing downward pressure on midpoint yields.

Melbourne’s industrial sector is expected to see continued occupier demand throughout the remainder of the year as firms mull over options for inventory management post-pandemic. JLL says demand will remain elevated and new supply will be gradually absorbed as it is constructed, with relatively little to be available to tenants at completion.

“We expect midpoint yields to edge lower through the remainder of the year as strong investor demand for Melbourne’s logistics assets creates downward pressure on yields. We expect yields to reach a new midpoint record low (3.88%) by 4Q21 before stabilising at this level for the next 2 to 3 years.”

Here’s more from JLL:

Occupier take-up remains very strong for a third quarter

Occupier demand has maintained its high-level with 445,700 sqm of gross take-up; however, this has decreased slightly (-19%) since the previous quarters’ record level of 546,900 sqm. Take-up in the West accounts for 60% of the activity, with 269,100 sqm at more than double the 10 year-quarterly average (113,200 sqm).

Four industry sectors have accounted for 85% of take-up this quarter – retail trade (24%), manufacturing (26%), wholesale trade (14%), and, transport, postal and warehousing (21%). Drivers of take-up include growth of the e-commerce sector but also growth in construction and media sectors.

Record new development commencements

Completions have rebounded in the quarter with 11 projects reaching practical completion, doubling last quarters gross completion of 125,700 sqm. Of this, 87% had been pre-committed to, with the North Precinct exhibiting a 100% pre-commitment level.

17 projects commenced construction in 2Q21, with 334,200 sqm entering the supply pipeline. Of this, 158,900 sqm were pre-committed (48%) making the pre-commitment level just below the average for Eastern cities in the quarter (50%).

Yields compress to new record lows

Recent transaction evidence including recent portfolio activity has had a compressive effect upon yields in Melbourne, and nationally. Prime market yields in 2Q21 sharpened by 12.5 bps over the quarter, bringing the year-on-year change to -88 bps across the precincts. Each of the precincts exhibited a range of 25 bps.

The core industrial markets of Melbourne have been accessed by onshore and offshore investors in the quarter, continuing the already high level of transaction volumes of previous quarters. The volume of transactions in 2Q21 is higher than reported, given that some portfolio sales (including the AUD 3.8 billion Milestone portfolio) was not attributed values at an asset or market level.

Note: Melbourne Logistics & Industrial refers to Melbourne's industrial market (all grades).