Australian industrial property cap rates have been on the most pronounced compression-and-correction cycle of any commercial property sector over the past decade. From wide post-GFC levels through to historic tights in 2021-2022 and the subsequent widening through 2022-2024, the cycle has reset industrial valuations multiple times. For investors, the cycle has produced both substantial wins and substantial markdowns depending on entry and exit timing.
This guide covers the structural drivers behind the industrial cap rate cycle, where current levels sit relative to historical bands, the submarket and asset-class variation within the headline, and the buyer-side framework for industrial in the current cycle.
Industrial is no longer the consensus-cheap commercial sub-class it was a decade ago. The structural story is intact; the cyclical pricing has shifted. The buyer-side discipline is to read both correctly.
The Structural Story
The post-2015 industrial story has been driven by:
- E-commerce growth. Online retail share of total retail has roughly doubled. Online retail requires more warehouse space per dollar of revenue than physical retail.
- Supply chain reorganisation. Just-in-time supply chains shifted toward held-inventory models, increasing total warehousing demand.
- Last-mile logistics. Same-day and next-day delivery requires distributed metro warehouse networks.
- Cold chain expansion. Online grocery, restaurant aggregators, and pharmaceutical cold chain have all expanded refrigerated logistics demand.
- Industrial gentrification. Inner-city industrial land has been redeveloped to higher-value uses, reducing supply in metro locations.
1 The Cap Rate Cycle
Pre-2015 era
Industrial traded at cap rates 200 to 400 basis points above CBD office, reflecting perceived lower asset quality and tenant covenant. Wide-bid market.
2015 to 2019
Compression began as the structural demand story emerged. Cap rates narrowed by 100 to 200 basis points across most submarkets.
2020 to mid-2022
Sharp compression. Industrial cap rates reached historic lows globally, supported by record-low cash rates and elevated capital allocation to industrial real estate. Some prime Sydney west industrial traded at sub-4% cap rates.
Mid-2022 to 2024
Sharp correction. Rising cash rates and 10-year bond yields drove cap rates wider by 100 to 250 basis points across submarkets. The correction was rapid in transaction terms but uneven across submarkets and asset types.
2024 to current
Stabilisation in most submarkets with continued upward pressure in others. Cap rates have settled at levels meaningfully above 2022 tights but still below 2015-2019 averages.
2 Current Cap Rate Bands
Current cap rate bands move with each reporting cycle. The general framework:
Prime metro industrial
Sydney west (Eastern Creek, Erskine Park, Wetherill Park), Melbourne south-east and west (Truganina, Laverton North, Dandenong South), Brisbane south (Yatala, Crestmead). Long-WALE national-covenant single-tenant: tightest in the industrial spectrum.
Secondary metro industrial
Mid-distance metro corridors. Shorter-WALE, mid-covenant: 50 to 150 basis points wider than prime.
Regional industrial
Newcastle Hunter, Geelong, Toowoomba. Wider cap rates reflecting smaller buyer pools.
Older or functionally constrained industrial
Pre-2000 stock with limited clear height, restrictive access, or compromised location. Materially wider than prime.
3 What Drives the Variation
Within the industrial sector, cap rate spread is driven by:
Building specification
Modern logistics specification (10+ metre clear height, hardstand, ESFR sprinklers, multiple loading docks) vs older lower-spec buildings.
Tenant covenant
National listed logistics tenants vs single-private-operator tenants. The covenant premium is substantial.
Lease structure
Long-WALE with CPI plus minimum reviews vs short-WALE with fixed reviews. Inflation protection matters.
Location
Last-mile metro vs greenfield outer-ring vs regional. Land value alone produces meaningful spread.
Land value coverage
The proportion of asset value attributable to land vs improvements. Land-rich industrial benefits from land price appreciation; building-heavy industrial less so.
4 The Pre-Lease vs Existing Lease Differential
Pre-lease (forward-leased) industrial typically trades at tighter cap rates than equivalent existing-leased properties. The reasons:
- Pre-leases are typically longer-WALE (10+ years) than existing leases at acquisition.
- Pre-lease tenants are screened more thoroughly; institutional tenants dominate pre-lease activity.
- The building is new at acquisition, with no near-term capex.
For buyers, pre-lease industrial captures the lowest cap rates available; the trade-off is no rent growth from acquisition to occupation and the development risk before practical completion.
5 Buyer-Side Framework in the Current Cycle
Underwrite conservative cap rate exit
Exit cap rate assumption should be at least at par with entry. Tighter exit assumptions require an explicit thesis (continued structural compression, submarket rerating).
Test inflation pass-through
CPI plus minimum reviews provide inflation pass-through. Fixed reviews below the inflation rate produce real income decline. The buyer-side review should test the lease structure carefully.
Watch the supply pipeline
Where the supply pipeline is substantial relative to existing stock, market rent growth assumptions need to be tempered. Each submarket has its own supply trajectory.
Differentiate prime vs secondary
The performance gap between prime modern logistics and secondary older industrial has widened. Acquiring prime at tighter cap rates can be better economics than acquiring secondary at wider rates.
6 Sub-Class Variation
Last-mile logistics
Smaller-format (3,000 to 8,000 sqm) urban infill warehousing. Tightest cap rates in industrial; substantial e-commerce-led demand. Limited supply in metro locations.
Bulk logistics
Large-format (15,000+ sqm) outer-ring warehousing. Wider cap rates than last-mile; deeper supply pipeline.
Cold storage
Specialist industrial covered in dedicated guide.
Trade and small-format industrial
Sub-1,000 sqm trade-zoned industrial. Smaller tenant base, wider cap rates, more private-investor accessibility.
Frequently Asked Questions
Where are cap rates likely to head?
Cap rate trajectory depends on bond yield trajectory, capital allocation to industrial, and supply-demand fundamentals. Forecasting requires assumptions on each; the consensus has been for stabilisation or slight further widening from current levels.
Is industrial still the place to be?
The structural story remains intact. Whether current pricing offers attractive risk-adjusted return depends on the specific asset. Sector-wide views are less useful than asset-specific underwriting.
What's the right hold period for industrial?
Most institutional industrial holds are 5 to 12 years. Shorter holds risk being caught in cycle troughs; longer holds provide more inflation pass-through but require ongoing capex commitment.
How do I track current cap rates?
Knight Frank Industrial Insight, JLL Industrial Logistics, Colliers Industrial Research, and Savills Industrial Series all publish updated cap rate data periodically. Recent transactions provide the freshest evidence.