The one overlooked city presenting a strong investment opportunity

What does a market look like just before it turns? Usually, it’s when people are most pessimistic about a market’s prospects.

There’s been a lot of negative press about Victoria’s significant government debt. This has been reflected in commercial asset prices. Yields have softened and institutional investors have largely shifted their attention to other locations.

The case for caution, however, isn’t hard to make.

Analysis from Knight Frank showed transaction volumes across Melbourne’s industrial property sector totalled $3.1 billion in 2025, down 23 per cent from 2024, indicating a sustained contraction in investment activity as capital chases opportunities in other east coast markets.

And research from JLL shows yields have decompressed across most precincts and headline vacancy hit 5.3 per cent at the end of last year, driven by a wave of speculative supply that hit the southeast precinct harder than most anticipated. While that is an increase, it’s a vacancy rate that office owners could only dream of.

With the additional land tax hit for foreign owners also weighing on the market, it’s not surprising that investors who are focused on the short term, are looking elsewhere. But for counter-cyclical investors, those are the conditions drawing them in.

From a population perspective, Melbourne is growing at a pace well ahead of most other capital cities.

According to Knight Frank, Melbourne’s population has grown by around 1.8 per cent each year over the past 25 years, consistently outpacing both the national average and that of every other advanced economy globally.

In the year to June 2025, Melbourne’s population grew by approximately 123,500 people, more than any other Australian capital in absolute terms, with the Victorian capital on track to overtake Sydney as the nation’s largest city.

That growth, and the logistics demand it generates, is supported by a $200 billion transport infrastructure investment program through to 2036, including the $26.1 billion North-East Link and the $10 billion West Gate Tunnel.

The Port of Melbourne is Australia’s busiest, with container volumes up around 25 per cent since 2018, according to Knight Frank.

That growth is underpinned by the expansion of e-commerce and a steadily growing consumer base. More people buying more things online means more demand for warehousing.

Melbourne’s industrial market also offers an affordability advantage not seen in other east coast markets.

Knight Frank’s research showed a prime industrial warehouse in Melbourne is approximately 45 per cent cheaper to rent than an equivalent space in Sydney, with land values in the west and north precincts less than half the cost of Sydney’s most affordable industrial areas.

For industrial occupiers weighing up where to base their distribution hubs, that cost difference is hard to ignore.

Within the broader market, the story varies considerably by precinct. Melbourne’s west is currently dominating the industrial leasing market, with JLL reporting it accounted for 70 per cent of gross take-up in Q4 2025, totalling 199,700 square metres.

New supply in the west is also becoming increasingly scarce. Knight Frank data showed new industrial developments in the west fell 68 per cent in 2025 to 208,000sqm, down from 643,000sqm in 2024. Looking forward, just 168,000sqm of new developments are forecast to be delivered in 2026.

In the southeast, market fundamentals were more volatile. New supply in 2025 pushed the vacancy rate to a 10-year high of 3.7 per cent. ­­­

New supply is expected to moderate significantly in 2026, with just 84,000sqm of new industrial space forecast for the southeast.

In the east and the city fringe, Knight Frank says vacancies are much tighter, with the eastern precinct’s vacancy sitting at 1.5 per cent, well below its 10-year average of 2.8 per cent, while the city fringe is currently commanding the market’s highest rents at $190/sqm.

Melbourne short on sentiment, high on fundamentals

For investors eyeing a contrarian play, the leasing fundamentals present an increasingly interesting case.

Entry barriers have also fallen, with the Victorian Government’s Commercial and Industrial Property Tax Reform replacing stamp duty on commercial and industrial properties with an annual property tax for transactions from July 2024, meaningfully reducing the upfront cost of an acquisition.

According to CBRE, prime and secondary yields are currently sitting above their 10-year averages, at levels not seen since 2016.

With supply tightening and the foreign buyer selling cycle nearing completion, CBRE forecasts yield compression in the years ahead.

That represents a window for counter-cyclical investors to acquire assets before domestic capital moves back in and compresses returns.

Markets that are out of favour rarely stay that way when the fundamentals are sound.

Melbourne industrial currently has a short-term sentiment problem, not a structural one. The population is growing, infrastructure is being delivered and the port is busier than ever.

At the same time, new supply is moderating and yields are at their most attractive in nearly a decade.

Investors who recognise and act on a gap between sentiment and fundamentals tend to be the ones who look back on decisions like this most favourably.

Melbourne industrial is that market right now.