Vacancy rises, but Melbourne industrial tenants keep leasing

Melbourne, Australia – Melbourne’s industrial leasing market is entering a new phase of rebalancing, with vacancy climbing to its highest level in a decade despite leasing activity remaining well above long-term norms, according to Knight Frank’s Melbourne Industrial State of the Market Q2 2026 report.

The report found Melbourne’s industrial vacancy rate reached 5% in Q2 2026, almost double the market’s 10-year average of 2.6%, as occupiers gain greater choice following a wave of development completions over the past two years.

At the same time, leasing demand remains resilient, with 723,699sq m of take-up recorded in the first half of 2026, tracking ahead of the long-term average.

A key trend emerging across the market is that while tenants are continuing to transact, many are using current conditions to consolidate operations, improve building quality and increase capacity, rather than expanding their footprint.

Knight Frank Partner, Head of Research & Consulting Victoria Dr Tony McGough said Melbourne’s industrial market was transitioning from landlord-led conditions to a more balanced environment.

“The most notable story in the market is that vacancy has risen to 5%, its highest level in around a decade, yet take-up remains remarkably strong. This tells us demand hasn't disappeared – it has become more selective.

“Occupiers now have greater choice and more negotiating power than they did during the supply-constrained years of 2018 to 2020. We are seeing many businesses take the opportunity to relocate into newer, more efficient facilities or consolidate multiple sites into a single asset.

“While face rents are continuing to grow, incentives have risen significantly, meaning effective rental growth is much more subdued than headline figures suggest.”

The report shows prime net face rents increased 5.6% year-on-year across Melbourne to an average of $155 per square metre, however incentives rose to 21.2%, limiting gains in effective rents.

Despite softer leasing conditions, the development pipeline is also beginning to moderate. New industrial supply is forecast to total 530,000 sqm in 2026, representing a 37% decline from 2025, which is expected to gradually ease upward pressure on vacancy levels.

Knight Frank Partner, Head of Industrial Logistics Victoria Joel Davy said the current market presents a window of opportunity for occupiers.

“Tenants are in a stronger position than they have been for several years. The increase in available space and higher incentives are creating opportunities for businesses to secure better quality facilities on more favourable terms.

“Importantly, leasing demand remains robust across Melbourne. We are still seeing significant activity, particularly from occupiers seeking operational efficiencies, higher-clearance warehousing and modern facilities that can support automation and changing supply-chain requirements.

“The market is not experiencing a demand problem; rather, it is working through the elevated level of supply delivered over recent years.”

The North remains Melbourne’s softest industrial precinct, with vacancy rising to 7.7%, the highest in the city, while the West reached 5.7%. In contrast, the East continues to outperform, recording vacancy of just 2%, making it the only precinct with availability below its long-term average.

Knight Frank expects the market to remain tenant-friendly through the remainder of 2026, although the slowdown in new completions is likely to help stabilise conditions over time as existing vacant stock is absorbed.

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For further information, please contact:
Vanessa De Groot – Marketing & Communications, Knight Frank
Vanessa.degroot@au.knightfrank.com +61 410 460211

Notes to Editors
Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, the Knight Frank network has 600+ offices across more than 50 territories and more than 20,000 people. The Group advises clients ranging from individual owners and buyers to major developers, investors, and corporate tenants. For further information about the Firm, please visit www.knightfrank.com.