Steady strength in a shifting industrial market

The industrial property market has been on quite a journey over the past few years. A significant shortage of entry-level industrial assets pushed values up sharply during the market peak in 2021 and 2022, with strong momentum continuing throughout 2023. However, since the end of last year, that price growth has started to slow, and the softer conditions have carried into 2025 so far.

Right now, the industrial sector remains the strongest performer out of the three main commercial asset classes, with demand continuing to outpace available supply. Both metropolitan and regional markets are holding up relatively well despite broader economic challenges. In regional areas especially, there’s still strong demand from both owner-occupiers and investors looking for entry-level industrial opportunities. The real hurdle is the lack of new supply – limited land availability and rising construction costs are making it difficult to bring new stock to market. This is likely to keep a solid price floor under existing assets.

The rise of e-commerce, accelerated by the COVID era, has also had a lasting impact. Australia’s online retail activity is now tracking around four years ahead of where it was expected to be pre-pandemic. That trend isn’t going away, with e-commerce penetration forecast to reach 15 per cent by 2027. This shift has also driven strong demand for last mile logistics, particularly in Sydney, Melbourne, and Brisbane where well-located warehouses near urban centres have become critical for meeting consumer expectations around fast and reliable delivery.

Despite the sector’s strength, challenges remain. Higher construction costs coupled with planning and servicing delays in several key precincts are adding significant complexity and cost to new developments. This is starting to impact the feasibility of future projects and could constrain the supply pipeline moving forward.

There are still several areas of opportunity in the market. Supply in Melbourne’s south-east, Sydney’s central west and west, and Brisbane’s Trade Coast continues to fall short of annual demand. This imbalance is likely to support continued rental growth in those regions. Well-located entry-level industrial assets – particularly those with existing or potential income streams, close proximity to transport infrastructure, or redevelopment upside – are highly attractive to both high-net-worth investors and developers looking to landbank.

Even with approximately 2.3 million square metres of industrial space currently under construction nationwide, the market remains structurally undersupplied. Rising construction costs and servicing delays are likely to limit how much new stock actually makes it to market over the next few years. Interestingly, 2024 saw a shift in demand from large-scale facilities to smaller ones. After years of big-box spaces dominating leasing activity, smaller format facilities are now leading the way by a considerable margin.

At the same time, regional industrial markets are attracting owner-occupiers who’ve either been priced out of metropolitan areas or are choosing to sell up and relocate with enough capital left over to reinvest into their businesses. Many regional centres also have a strong population growth story behind them. For example, the Illawarra Shoalhaven region is projected to grow by around 130,000 new residents by 2041. It’s also expected to have the highest growth in working-age population among all New South Wales regions, which will likely drive demand for local jobs and, by extension, industrial space.

The sector’s strong performance over the past five years has been impressive, but it’s also raised concerns about overheating. In some submarkets – such as Brisbane’s west, Melbourne’s north and Adelaide’s outer north – supply is beginning to creep ahead of long-term take-up volumes. However, even in these areas, vacancy rates remain well below what’s considered a balanced level, suggesting there’s still some buffer before we see any real signs of oversupply.