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_Navigating the post-surge industrial landscape: What’s next?

Following a dramatic surge in East Coast industrial leasing take-up post-COVID, peaking in 2021 at over 30% above pre-pandemic levels, tenant demand has begun to stabilise. This surge, initially driven by evolving consumer delivery expectations but compounded by supply chain issues post 2020, significantly tightened the market; driving vacancy below 2%, slashing tenant options and pushing net prime rents up by 30–60% over three years.
July 01, 2025

Over the course of 2024, this frenzy eased, and the market returned to more normal levels, impacting rental growth and the development pipeline. What does this mean for tenants and developers going forward?

Rental growth proven to be highly sensitive to vacancy

Rents can be seen to be highly sensitive to vacancy with a clear threshold point, particularly demonstrated in Brisbane and Melbourne. Sydney, despite being below 2% for a significant time, still showed rental growth sensitivity to changes in vacancy. The Sydney market is now demonstrating there was an element of overshooting, due to a scarcity mindset from tenants during 2022/3, now unwinding.

3% Vacancy: The Trigger for Accelerated Rental Growth

Knight Frank research has determined that the trigger for super-charged rental growth is vacancy in the order of 3%, or a clear path to vacancy below that benchmark within the next 6 months.  This is relatively low compared to the office sector which is c5%. During 2024 the Brisbane and Melbourne markets have increased above 3% vacancy and an associated weakness in prime effective rental growth is emerging in those markets.

The tipping point occurs when the level of choice in existing assets is insufficient to meet tenant needs. This forces or encourages tenants to take pre-commitments or newly built speculative  accommodation and accept the associated rental premium.

Economic rents, or the rents necessary to make new development feasible, surged as higher construction costs, land values, and softer yields since 2022 pushed thresholds upward. As tenants accepted record-breaking rents for pre-commitments and speculative leases, broader market rents followed suit.

Pre-commitment leasing activity has cooled

Reaching half of all leasing activity during 2020 the pre-commitment market has slowed as feasibility and delivery timing issues emerged, diverting some new build demand into speculative developments. Building generic speculative product was seen as a lower risk option by developers and tenants appreciated the certainty of delivery.

The sharp decline in pre-commitment activity through 2024—dropping to just 15% of all leases signed in Q1 2025—highlights the growing challenges to secure agreement for new developments. This reflects a conservative shift in tenant behaviour, as occupiers increasingly favour existing stock or speculative over purpose-built space, keen to avoid higher costs, uncertain lead times and delivery risk, opting for more immediate, lower-risk leasing solutions.

Construction responds quickly

The level of construction has already shown signs of quickly adjusting to higher vacancy and less certainty of obtaining a further step-up in rents to maintain feasibility. From a high of 2.6million sqm in 2024 supply is expected to fall by 20% in 2025 to just over 2 million square metres.

The short lead time for industrial construction means that a significant overhang of completed industrial supply is unlikely to happen. While speculative development made up 40% of total completions over the past three years this will lift to 60% in 2025 due to projects already under construction and lower pre-commitment delivery. Further speculative starts will defer if the expected leasing take-up timeframe or rental level falls outside of feasibility parameters and/or investors remain subject to capital constraints.

What’s next for rents, land values and development?
Effective rental growth is expected to remain subdued on an aggregated basis in the short term, as vacancy lifts. However, there will be significant divergence between cities and precincts as vacancy becomes concentrated in emerging areas, leaving established precincts with more robust rental growth expectations. Even for precincts where vacancy has lifted significantly it is expected that face rents will be defended with a corresponding increase in incentives to impact effective rents.

Lower speculative development and pre-commitment delivery will reduce industrial new supply delivery through H2 2025 and into 2026, returning balance to the market relatively quickly. The ongoing search for optimisation and efficiency across the supply chain will maintain baseline demand for new space where feasible, however some tenants may continue to defer relocation decisions. Development at more sustainable levels will emerge from 2026.

Land values, particularly for serviced land, will continue to remain robust. In contrast to building construction timeframes it has been proven in recent years that the timeline for industrial land servicing and development is the critical step in the development process. Lessons learnt across Western Sydney and to a lesser extent Brisbane and Melbourne, particularly around water and power delivery, will insulate serviced land values even as immediate demand eases.

This article can be found in the latest edition of Knight Frank’s national industrial flagship publication, SPACE, which showcases current opportunities in the industrial sales and leasing market, as well as providing up-to-date insights on the market. You can view the entire report here.