5 things for industrial occupiers to consider as warehouse vacancy rises

After experiencing one of the longest boom periods in recent history, with e-commerce and international supply chain disruptions fuelling demand, vacancy in Australia’s industrial sector is finally returning to more ‘normalised’ levels.

Leases signed through the pandemic when businesses needed to hold more stock onshore are expiring. Occupiers that signed leases at record-high rents post-pandemic are also reviewing their space requirements amid the current economic climate. These factors are causing a shift in the supply-demand dynamic, giving leverage to occupiers.

“After several years having to make do with what is available, occupiers are in a strong position to negotiate their terms,” says Matt Lee, head of JLL’s logistics and industrial occupier services, who outlines important considerations for occupiers as they enter negotiations.

In Melbourne, which is Australia’s biggest industrial market with 29.6 million square metres of industrial real estate, vacancy currently sits at 3.02%. Sydney, with 23.1 m sqm of total industrial space, has vacancy of 3.5%. Throughout COVID, vacancy was a record low 1% in both cities among high quality assets.

JLL’s research indicates a rising proportion of sublease space in pockets such as Sydney’s outer central west, and Melbourne’s northern suburbs. Meanwhile, significant rental growth is highlighted as one reason occupiers are reconsidering their warehouse options.

Lee has seen landlords and tenants adjusting their approach, pointing to an increase in non-traditional lease structures, discounted sublease space, and occupiers looking to buy their own warehouses.

“Vacancy is rising and it’s rising quickly. Occupiers should assess their business operations and space requirements and understand what this means for them,” he says.

Below are five considerations for warehouse occupiers as industrial vacancy rises.

Warehouse subleasing is increasing and being offered either at a discount to market rent, or also with inclusions such as racking. However, be mindful that the gap between rents for existing buildings and those not yet built (speculatively developed, or pre-lease) is returning, meaning higher rents for the latter. This will affect businesses that have bespoke property requirements, or solutions that require a long lead time.

Greater vacancy means greater choice for occupiers on renewals and relocations, and this can be leveraged to secure favourable terms. Consider that some landlords will want to pursue early lease renewals with their tenants before the rental market changes significantly. Also consider alternatives to traditional lease structures. Ground leases, turnkey purchases, and small lot land sales are returning to the market.

While face rentals on direct leasing deals with institutional landlords have only slightly decreased, incentive levels have risen sharply. Managing the different types of offers being tabled against business needs is critical to success. 

Outgoings – especially statutory outgoings – and gross occupancy costs continue to climb. Businesses are reporting between 30% and 100% increases in land tax. Conduct true gross modelling across the term of your lease before making any major tenancy decisions.

For groups holding warehouses on their balance sheets, sale and leasebacks could be an option. There is an abundance of capital chasing this type of opportunity.

For more information on your occupancy needs contact Matt Lee or visit JLL’s website. For capital markets, or for a valuation of your property or portfolio, contact Ben Hegerty and JLL’s industrial capital markets team.