Supply outpaced demand in 2017
Austin’s industrial market picked up the pace closing out 2017 with the vacancy rate for the metro area dropping to 7.3%, a decrease of 40 basis points quarter-over-quarter, although an increase of 280 basis points year-over-year. In addition, net absorption jumped out of the red at 480,995 sq. ft. as of the quarter’s end, up from negative 194,867 sq. ft. in Q3 2017. Steady demand led to an average asking rent $10.52, a figure that has remained largely unchanged the last two quarters. More than 2.8 million sq. ft. delivered in 2017, with about 50% of that space available for lease. In addition, there is 2.0 million sq. ft. under construction with 80% available for lease, which may continue to contribute to the slower pace in Austin industrial—particularly when compared to the faster leasing markets recorded in 2015 and 2016.
Austin’s manufacturing sector grew robustly
The Austin economy grew at a healthy pace in November. The seasonally adjusted area unemployment rate for November was 2.8%, remaining well below the 10-year average of 4.3%. In addition, the state average jobless rate fell to 3.8%, the lowest on record. Job growth in Austin picked up speed over the three months through November as financial activities, manufacturing and transportation services all increased. The Austin Purchasing Managers Index indicated continued growth in the area’s manufacturing sector in November, although at a somewhat moderate pace compared with earlier in 2017.
Uptick in demand drives vacancy down
Most of the 2.8 million sq. ft. delivered to the Austin industrial market in 2017 has not yet been occupied by tenants. Net demand was slow in the first three quarters of the year, although back in black at 480,995 sq. ft. as of Q4 2017. The uptick in the fourth quarter lowered the vacancy rate to 7.3%—though a far cry from the pace set at this time last year with vacancy at 4.5%. The vacancy rate in Warehouse/Distribution space dropped to 7.5%; checked in at 2.1% in Manufacturing; while Flex space finished the year at 10.8%. The Southeast submarket had the highest overall vacancy rate at 9.9%, and the Northwest submarket had the lowest overall vacancy rate at 4.3%. The Northeast submarket had the largest amount of vacant Flex space at 13.5%, out of a total inventory of 6.0 million sq. ft., while the Southeast submarket had the most significant amount of vacant Warehouse/Distribution space at 9.6%, from 11 million sq. ft. of total stock. Manufacturing had a tight 2.1% vacancy rate out of 16 million sq. ft. of total inventory.
Net absorption back in positive territory
Austin ended the fourth quarter of 2017 with positive 481,000 sq. ft. of net absorption. Flex space represented positive 356,000 sq. ft., Warehouse/Distribution space was responsible for positive 263,000 sq. ft., and Manufacturing was at negative 137,000 sq. ft. Year-to-date net absorption ended positive at 137,969 sq. ft. The major move-ins contributing to net absorption in Q4 2017 included 57,600 sq. ft. of space occupied at 401C Parker Drive, in the North submarket; 48,498 sq. ft. taken at 8024 Exchange Dr. – Building 9 in the Northeast submarket; and 43,978 sq. ft. leased at 1905 Kramer Lane in the North submarket. The major move-outs in 2017 involve Pearson Inc. leaving 135,442 sq. ft. at 905 W. Howard Lane in Tech Ridge Five; and International Bio Medical exiting 124,071 sq. ft. at Walnut Creek #21.
Southeast submarket claims half of all construction
There is currently 2.0 million sq. ft. under construction in the Austin industrial market, with a large percentage of that space available for lease. The largest projects underway at the end of fourth quarter 2017 were the 162,232-sq.-ft. Building 2 at 4500 S. Pleasant Valley Road; and Springbrook Corporate Center – Building 8, with full availability of 160,000 sq. ft. Some notable 2017 deliveries include Capitol Wright Distribution Center, a 500,000-sq.-ft. facility that delivered in first quarter 2017 and is now 100% occupied; and Freeport Tech Center South – Building 2, a 142,800-sq.-ft. property. The Southeast submarket, with its improved infrastructure, proximity to the airport and accessibility to San Antonio and Houston, has the most construction underway with 1,017,735 sq. ft. as of Q4 2017. Up and coming, the City of Buda in the Hays County submarket is scheduled to break ground on 600,000 sq. ft. of industrial space in 2018. Initial construction on the project will include a 300,000-sq.-ft. building projected to begin early in the year. The complex is going up on a 30-acre parcel of grassland just east of I-35, near the U.S. Foods distribution center in Buda, south of Austin. The developer, Exeter Buda Land LP, is said to plan to invest between $7 to $14 million into the project, creating 50 jobs for the area.
Investors on watch for assets to secure
Real Capital Analytics data reports year-to-date industrial sales volume in the Austin area at $340 million, resulting in a year-over-year change of -26% as investors continue to struggle locating assets to acquire in Austin. The buyer composition is spread evenly across the primary categories with 29% institutional, 29% private, 24% public listed/REITs, and 19% user/other. A positive sign for the Austin industrial market during the fourth quarter was the acquisition by TA Realty, of Rutland I & II at 10220 Metropolitan Dr.; a 2-building 113,950-sq.-ft. industrial/warehouse property, from MCA Realty.
Leasing activity rose during the fourth quarter with a total of 1.8 million sq. ft. leased in the overall Austin market, an increase of 445,000 sq. ft. from last quarter. This is in comparison to 2.4 million sq. ft. leased this time last year. On a percentage basis, transactions grew quarter-over-quarter by 31%, while the year-over-year drop was at 20%. The largest lease signings occurring in Q4 2017 included the 130,230-sq.-ft. lease signed at Highway 183 and Burleson Road in the Southeast submarket; the 107,780-sq.-ft. deal inked by Goodwill plus an additional 67,640 sq. ft. leased by an undisclosed tenant, both at Heritage Crossing in the North submarket; and the 57,600-sq.-ft. lease agreement at 401C Parker Drive, also in the North submarket.
Average NNN asking rates steady
The Austin industrial market saw overall NNN average asking rates inch down $0.03 per sq. ft. quarter-over-quarter to finish at $10.52 at the end of Q4 2017. Rates for industrial real estate throughout Austin show that the Northwest submarket has the highest prices for industrial space at $13.80. The average rate for Flex space is currently highest in the Northeast submarket, at $15.25 per sq. ft.; Manufacturing rates peak in the Georgetown/Round Rock submarket, at $11.50; and Warehouse/Distribution space is at its high point in the Southeast at $10.37.
Director of Research
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