Melbourne’s industrial market has continued to strengthen in 2003 after a solid 2002.
Large leasing transactions have been strong on the back of purpose built pre-commitments, a feature of the industrial leasing market over the last three to five years.
Expansion of floor space by larger tenants and owner occupiers has also been evident, an indication of the strength of the economy, and in particular manufacturing in Victoria. With the prospect of stronger economic growth ahead, the industrial market would be expected to benefit as a result.
Although industrial construction has been strong, rising construction costs are making speculative development scarce, placing more emphasis on the purpose built pre-commitments.
With the current stagnation of industrial rents, existing industrial premises have also been able to better compete with the cost of new development, a reversal of the recent trend to prefer the “cheaper” purpose built option.
In addition to construction costs, land values are also putting upward pressure on rentals. Improvements in road infrastructure over recent years has provided the opportunity for the north and west land values to reduce the differentiation with the higher land values in the traditional industrial areas of Melbourne’s south east.
Anecdotally, the “urban boundary” of the State Government’s planning strategy Melbourne 2030 has placed upward pressure on industrial land values and has further encouraged land banking by institutions and developers.
Rents have remained stagnant despite several factors having placed upward pressure on Melbourne’s prime industrial rents.
Over recent years, the anticipated rise in construction costs would have been reflected in pre-commitment rentals, as with the higher underlying land values. Rents have however, been able to withstand the upward pressure, having shown little growth over recent years in the traditional industrial areas to the south east and on the city fringe.
The ability of rents to remain steady has primarily been the result of developers and institutions land banking in the past, having already secured large parcels of land at a comparatively cheaper time.
Cheaper land purchases have provided for an environment of competitive rents, without having today’s land values impacting significantly on the cost of industrial development.
Not until such time as those land banks are absorbed will the increased land values be reflected in asking rentals. To a lesser extent, the stagnation of rents has also been a result of developers willing to absorb a proportion of the increases of construction costs in their profit margins in an attempt to remain competitive with rentals.
*Glenn Lampard is Research Manager for leading commercial Knight Frank.
