Melbourne has racked up industrial sales of $658 million over 21 deals this year – just short of the $706.2 million over 27 transactions last year – and local institutions accounted for 92 per cent of them.

"Domestic investors have been quite focused on these because they are core assets for their portfolios," Knight Frank researcher Monica Mondkar said.

"It's not that they (overseas buyers) aren't bidding for them – they are getting out-bid by Australian investors who are keen on increasing their market share."

Yields have tightened 25 percentage points as the competition increases, with the average yield  from 7.7 to 8.25 per cent. A new building with a 10-year lease can sell for less than 7 per cent, Knight Frank research found.

Unlisted funds and syndicates made up 61 per cent of the purchases, while listed trusts accounted for a further 19.3 per cent and superannuation funds made up 11.5 per cent of the acquisitions by value.

Propertylink has been the most active unlisted fund manager, buying portfolios around the country and other assets, including the five Melbourne Market warehouses for $77 million and 1-5 Lakes Drive Dingley for $14.1 million.

Sydney-based fund Heathley Asset Management paid about $8.6 million recently for an office warehouse in Altona North on a yield of 8.34 per cent.

The property, at 96-118 Toll Drive, is on 2.43 hectares and includes a 4500-square-metre warehouse and a 407-square-metre office.

The deal, negotiated by CBRE agents Chris OBrien and Rory Hilton and Logos, was underpinned by a pre-lease contract to Arrow Logistics.

Pre-leasing deals are driving the market. The Knight Frank research shows new industrial supply increased by 46 per cent this year, to total 513,736 square metres. However, it remains 15 per cent below the 10-year average.

Knight Frank head of industrial Gab Pascuzzi said vacancy rates could rise, especially because a further 593,653 square metres was due for completion next year.

"The rise in new supply largely resulted from an increase in pre-leases signed during 2013," Mr Pascuzzi said.

Nearly half of all new industrial space, 47 per cent, was being built in the western suburbs, he said.

While speculative development slowed in the west, pre-leasing activity was strong. Woolworths has signed up for a 25,000-square-metre cold storage facility at 441 Dohertys Road in Laverton North and Austrans has committed to a 14,500-square-metre warehouse at 31-33 Sunline Drive in Truganina.

The northern region, boosted by the Melbourne Markets, will be home to 32 per cent of upcoming supply, including Toll Transport's 71,000-square-metre distribution centre and TNT Freight's 38,000-square-metre facility.

The south-east, once the jewel in the industrial crown, will be home to only 17 per cent of new building next year. However, Savills has reported a strong increase in leasing deals in Dandenong.

Savills industrial director Kosta Filinis said 90,653 square metres had been leased in the area over the past year – 40 per cent of the total 238,000 square metres leased in the south-east and east.

The EastLink toll road and the revitalisation of the Dandenong city centre had helped attract new tenants to the area, Mr Filinis said.

"It used to take 25 minutes along Stud Road to reach Dandenong. Now it takes five to 10 minutes and this has had a huge impact," he said.