Industrial property entered 2026 as one of Australia’s most structurally supported and strategically important real asset classes. Following a cyclical downturn beginning in mid-2022, driven largely by rising interest rates, the sector has now moved into a stabilisation and early-recovery phase. This is supported by improving capital market conditions, long-term demand drivers and the rapid expansion of data, defence, automation and AI-enabled logistics networks.

How the industrial property sector is currently placed

The industrial sector as it stands is characterised by several key factors.

The cycle is close to / has reached its trough and confidence is returning

According to Trilogy Funds’ long-term cycle analysis, industrial property capitalisation (cap) rates reached all-time lows in 2022, aligning with a historically low cash rate. Across 2023 and 2024, as the cash rate increased, cap rates subsequently softened (increased). Importantly, this softening reflected cyclical adjustment, rather than structural deterioration.

As of early 2026, cap rates have stabilised and evidence suggests the cycle is close to troughing as transactional activity begins to recover and confidence improves.

The impact of the Reserve Bank Australia’s (RBA) consecutive rate hikes on cap rates remains to be seen. However:

The RBA’s 50 basis point cash rate hike is not expected to be transformational (at this stage)

On 3 February and 17 March 2026, the RBA increased the cash rate by 25 basis points as a result of persistently high inflation. The current cash rate now sits at 4.10%. Across all commercial property, the industrial sector remains the best equipped to absorb this monetary tightening due to low vacancy and sustained rental growth, albeit with some pressure likely on valuations.

As noted in the previous section, how cap rates respond to this change in the cash rate remains to be seen. If the cash rate remains only temporarily higher, the spread between the risk-free rate and industrial yields may narrow only temporarily. For example, should inflation moderate quickly, spreads are likely to re-expand sooner rather than later.

Importantly, the market has already priced and absorbed a material portion of higher debt costs throughout 2023 to 2025. Therefore, Trilogy Funds’ view is that the recent 50 basis point increase is meaningful, but not transformational.

Capital has re-engaged, but 2026 requires sharper selectivity

The recovery phase through 2025 saw widespread reengagement from syndicators, domestic institutions and offshore capital. Transactional volumes rose significantly, with buyers returning across the entire spectrum of industrial and logistics assets. While positive, 2026 will require more discerning underwriting.

The rebound in activity encouraged pockets of speculative development, nudging vacancy higher (albeit still below the long-term equilibrium). This shift requires greater discipline regarding tenant quality, rental growth assumptions, incentives and the durability of income streams when assessing new acquisitions.

Despite an increase in speculative developments, supply constraints – particularly high construction costs in the Northern Territory, Queensland and parts of regional Australia – persist and will continue to protect existing asset values.

In Darwin, for example, prohibitively expensive construction makes oversupply unlikely. Meanwhile, increasing automation and AI integration will require significant capital investment in new facility formats, further reinforcing demand for existing modern industrial stock.

More broadly, where speculative industrial development was already forecast to reduce in 2026, the increased cost of debt off the back of the RBA’s rate hike reduces the feasibility of new builds.

Income remains the sector’s anchor

Industrial income continues to underpin valuations. Despite minor increases in vacancy, Australia still boasts some of the lowest industrial vacancy rates globally. Rental growth, pre-commitments and elevated replacement cost dynamics continue to support existing assets.

This aligns with Trilogy Funds’ experience. Industrial tenants, particularly those operating across logistics, manufacturing and freight, continue to value long lease security, modern amenities and the operational efficiencies those facilities enable. This has helped maintain ‘sticky’ tenant profiles (those who are likely to remain in a property over the long term, rather than relocate at the end of a lease) across metro-adjacent and regional industrial hubs.

Competition for assets has intensified, but this has created opportunities

Institutional capital flowed aggressively into industrial and logistics assets in 2025, intensifying competition for tightly held metropolitan assets. Trilogy Funds’ approach, however, has been to focus on metro-adjacent and regional logistics hubs that share the same tenant quality and asset fundamentals, but are less crowded due to their smaller market size.

Large institutions often struggle to deploy sufficient capital in these markets, creating pricing inefficiencies and stronger return profiles for active managers.

The structural drivers strengthening demand for industrial property

While the industrial property state of play is strong, there are several drivers shaping the long-term demand of the sector.

Data, defence, AI and automation are reshaping industrial real estate

The strongest tailwinds currently shaping industrial demand are structural, not cyclical. In a recent interview with Livewire Markets, Head of Direct Property, Laurence Parisi, highlighted:

• Data volumes are exploding
• Defence spending is rising
• Automation is accelerating
• AI is reshaping supply chains in real time

Most investors express these themes through shares, but industrial real estate is the physical infrastructure that enables them. The acceleration of automation and AI-driven logistics is increasing demand for:

• Larger, high-clearance facilities
• Advanced racking and robotics-compatible environments
• Greater power capacity and digital connectivity
• Distribution hubs capable of higher throughput and more frequent parcel movements.

This is an acceleration of the trend whereby facilities are becoming operational infrastructure, not passive storage.

Accommodating e-commerce and inventory shifts

According to CBRE, online retail penetration in Australia has reached 14.3%, representing a structural shift in how goods are moved, stored and delivered rather than simply a change in consumer preferences. While this marks an all‑time high domestically, penetration remains below that of many developed markets, indicating further growth potential. As online retail expands, logistics networks become more complex and transport‑intensive, increasing demand for modern industrial facilities that can accommodate:

• Higher order volumes
• Faster fulfilment
• Higher clear spans
• Increased automation
• Faster throughput
• More fragmented delivery profiles
• Greater storage for ‘just-in-case’ inventory strategies that emerged post-pandemic

Distribution centres are increasingly required to function as fulfilment hubs rather than passive storage, integrating inventory management, transport coordination and last‑mile delivery within a single facility. As these pressures build, industrial assets with scale, flexibility and proximity to population centres play an increasingly central role in retail supply chains. This dynamic is further reinforced by broader forces shaping inventory strategies and supply chain resilience.

Geopolitical risk and the ‘just-in-case’ economy

Heightened geopolitical risk has re‑emerged as a meaningful macro-overlay. Escalating tensions in the Middle East, including conflict involving Iran and increased instability across the region, have heightened concerns over the security of key energy transit routes such as the Strait of Hormuz, reintroducing sustained upside volatility to global oil markets.

Any sustained lift in energy costs would likely feed through to higher transport, production and utility inputs, complicating the global disinflation narrative. For Australia, this creates a risk that inflation proves stickier than currently forecast, increasing the probability that the RBA is required to keep policy restrictive for longer than markets presently assume.

From an industrial property perspective, these dynamics reinforce structural trends already established since COVID-19, rather than reversing them.

Elevated supply‑chain risk, higher freight costs and geopolitical fragmentation continue to support the shift from ‘just‑in‑time’ to ‘just‑in‑case’ inventory management, alongside the selective onshoring and regionalisation of critical logistics and manufacturing functions. This favours greater demand for modern, well‑located industrial assets, particularly warehousing tied to domestic distribution, essential goods and energy‑adjacent supply chains.

While higher interest rates may weigh on near‑term pricing sentiment, the medium‑term fundamentals for industrial property remain underpinned by these resilience‑driven occupier behaviours, providing a degree of insulation relative to more cyclical property sectors.

Surging population will drive further industrial property demand

Cushman & Wakefield estimates that for every new person added to the population either through birth / death rates or net migration, an additional 4 sqm of warehouse space is required.

The Centre of Population Projections forecasts that Australia’s population will grow by approximately 400,000 each year between now and mid-2035, resulting in a total population growth of 4 million people.

Based on these figures, demand for industrial floorspace is forecast to grow by approximately 1.6 million square metres annually, for a total increase of 16 million square metres by mid-2035.

The time for industrial is now

The cyclical correction has now largely ceased, meaning the industrial sector’s 2026 outlook is defined less by recovery and more by positioning for the next wave of structural demand. Data infrastructure, defence logistics, automation, artificial intelligence, e-commerce penetration and evolving inventory strategies are reshaping the sector in real time.

Industrial real estate, whether in high-growth east coast markets or strategic hubs like Darwin, is no longer a simple warehouse play. It is the backbone infrastructure for a data-intensive, automated, supply-chain-driven economy.

This article is issued by Trilogy Funds Management Limited ABN 59 080 383 679 AFSL 261425 (Trilogy Funds) and does not take into account your objectives, personal circumstances or needs, nor is it an offer of securities. Investments in Trilogy Funds’ products are only available through the relevant Product Disclosure Statement (PDS). The PDS and the Target Market Determination (TMD) issued by Trilogy Funds are available at www.trilogyfunds.com.au. All investments, including those with Trilogy Funds, involve risk which can lead to no or lower than expected returns, or a loss of part or all of your capital. See PDS and TMD for details. Investments with Trilogy Funds are not bank deposits and are not government guaranteed. Past performance is no indicator of future performance.