Australia industrial vacancy falls as supply tightens

Australian industrial property vacancy fell to 3.7% in the first quarter, while new warehouse supply dropped to 337,000 square metres, according to Prological. It was the first national vacancy decline in more than two years.

Its Industrial Property Market Intelligence H1 2026 report said developers have become more cautious about speculative construction as construction costs remain high and borrowing costs rise.

The national pre-commitment rate reached 65%, indicating a growing preference to secure tenants before starting projects. Several approved developments now depend on tenant commitments, a shift that could delay completions into 2028 and beyond.

That is tightening conditions across most major markets. Every major city except Adelaide recorded lower vacancy in the quarter, with Perth remaining the country's most constrained market at 1.7% vacancy.

Prime incentives remain high despite the tightening. National prime incentives stood at 16.6%, while Melbourne super prime incentives were about 28%, suggesting occupiers still have some negotiating room even as available space narrows.

Cost pressures

The report linked the pullback in supply to several pressures affecting development and occupier decisions, including higher debt costs after three Reserve Bank of Australia rate rises in early 2026, along with rising freight, fuel and labour expenses.

Conflict in the Middle East has added to those pressures by increasing freight and fuel costs, which are also feeding into construction pricing. The report said this is changing how occupiers assess warehouse locations and making transport efficiency more important.

Sites closer to customers, or with stronger multimodal access, are becoming more attractive than cheaper land farther from demand centres. Rising fuel costs can also affect building quotes, making it harder for pricing to hold through the year.

Businesses are also paying closer attention to purpose-designed facilities rather than generic warehouse space as they seek to lower operating costs over time.

Peter Jones, Managing Director at Prological, commented on occupier thinking in the current market.

"The awareness is there now. Most businesses we work with understand that the right facility will lower their operating costs. The challenge has shifted from making that case to solving the transition: how do you get from where you are today to where you need to be, without disrupting the operation along the way," Jones said.

City markets

In Sydney, vacancy was broadly stable at 4.2%. No transaction above 20,000 square metres was recorded in the quarter, down from last year, when deals of that size accounted for close to 40% of activity.

Face prime rents in Sydney edged up to AUD $273 per square metre, but net effective rents have slipped slightly over the past two years once incentives are taken into account. Average incentives in the city were 18.4%.

Melbourne recorded the highest take-up in the country in the quarter, supported by two large deals in the North precinct. Vacancy fell to 3.8%, making it the tightest East Coast market, while completions were at their lowest level since 2022.

The Melbourne market may also be nearing a turning point on incentives. The report said prime incentives of around 28% could be at or near a cyclical peak.

Brisbane posted take-up more than 60% higher than in the same period a year earlier. Vacancy tightened to 4.0%, while prime rents rose 11% year on year, the strongest result among major markets since 2024.

Incentives in Brisbane remained lower than in the southern capitals at between 5% and 15%. That combination of stronger demand and relatively modest incentives points to firmer leasing conditions than elsewhere.

Perth remained the standout for scarcity. Vacancy compressed to 1.7%, and the North precinct had only 0.3% availability. The only development completed in the quarter was an owner-occupied facility.

Adelaide was the only major market to record a small rise in vacancy, which edged up to 3.0%. Even so, it remains one of the country's tighter industrial markets, with rent growth moderating to 4.9% annually as the market adjusts to a higher base.

Infrastructure work is also affecting Adelaide supply. The North South Corridor project is constraining available stock through compulsory acquisitions, adding another restriction in a market where vacancy remains low.

Automation trend

The report said automation is becoming more commercially viable for smaller warehouse formats than it was a year ago. It added that some current incentive packages can be structured to support fit-out or automation investment, giving occupiers another way to use landlord concessions in a tighter market.

Across the country, the combined effect of lower speculative supply, high pre-commitment rates and rising operating costs is gradually narrowing tenant leverage rather than cutting it abruptly. National vacancy at 3.7% is an early sign that industrial leasing conditions in Australia are tightening again after a prolonged period of easing.