Australian office and industrial property asset classes are upgrading

A lot has been written lately about upgrader demand for both office and industrial property across Australia’s major markets i.e., tenants moving into newer, more efficient premises when their current leases expire. Indeed, amongst the eastern seaboard industrial property markets, the strength of demand for prime properties has outstripped supply, driving total market vacancy rates down to extremely low levels, fuelling rapid rises in rents. By way of example, with market vacancy rates now under 0.5%, average prime net stated rents in Sydney’s Outer West have risen by more than 60% over the last two years.

This three-page research report expands on the following points:

• Up until two years ago, industrial property tenants coming to the end of long term leases were typically paying rents well above market, fuelling upgrader demand. Rapid market rent rises since 2021 has turned that logic on its head, and in turn lowered the appeal of upgrading.
  
• The major CBD Australian office markets are oversupplied, with double-digit vacancy rates that should be suppressing rental growth. However, historically high incentives are boosting the financial appeal for tenants to move into better quality space when their leases expire, even as stated rents rise in many locations.