Softening in Austin’s industrial market
Austin’s industrial market has felt some signs of softening in the first half of 2017, and ended the second quarter trying to recoup the drive it experienced this time last year. The vacancy rate for the metro area rose to 6.9% in Q2 2017, an increase of 100 basis points quarter-over-quarter and 200 basis points year-over-year. In addition, net absorption stood at negative 294,000 sq. ft. as of the quarter’s end. Even so, demand in the market has pushed rents to new highs, with the average asking rate per sq. ft. for Flex space at $14.32 per sq. ft., and Warehouse/Distribution space at $8.19. More than 1.6 million sq. ft. has delivered in 2017 with about 50% of that space vacant. In addition, there is still 1.4 million sq. ft. under construction with 73.7% available for lease, which may lead the way to more challenging times than the Austin industrial market has been accustomed to in the last couple of years.
Austin’s economy cooling down after overheating
Economic indicators in Austin have been relatively moderate in recent months. Even with a May jobs decline the area jobless rate remains at 3.3%, placing Austin among the 10 metro areas nationally with the lowest unemployment. Overall, Austin added 28,300 jobs between May 2016 and May 2017, a growth rate of 2.8%. Although there has been a recent slowdown in job growth, a steady low unemployment rate implies a strong labor market. The goods-producing industries, primarily electronic parts and machinery production, have seen an increase in the amount of jobs added. The flip side of that coin has been a decline in administrative services such as executive assistants and facilities support services. Education and health care services positions led Austin’s job growth over the past 12 months, according to a report from the Austin Chamber of Commerce regarding employment trends.
The size of the Austin industrial market has continued to grow in tandem with the population and economic growth of Austin itself. However, this size increase has not been uniform or even, and as market conditions continue to differentiate by size and type, certain tenants may find themselves in less enviable positions relative to their landlords when negotiating leases.
Much needed supply has been, and is being, delivered to market. However, this new supply is almost exclusively one type of product (large Class A tilt-wall facilities with 24 to 30-plus feet clear height) and is heavily focused in two geographic areas (the southeast area near State Highway 71/Ben White and the northeast Pflugerville area). These development projects usually comprise hundreds of thousands of available sq. ft. and require tenants to take 15,000 sq. ft. or more. For larger tenants looking for appropriate-sized facilities, the playing field with landlords is finally beginning to level. Underscoring this market trend is the fact that the availability rate is currently above 9% for sites greater than 20,000 sq. ft. in the Southeast submarket.
For small tenants looking for 10,000 sq. ft. or less, the market conditions are extremely tight, especially in locations close to Central Austin—so much so that the availability rate for small industrial sites (<10,000 sq. ft.) in each of the East Austin and South Austin submarkets is below a scant 2%. In these areas vacancies are low and rents are high, and tenants have to contend not only with demand growth but also with the supply of small spaces decreasing as older industrial sites are repurposed to office, retail, or residential use.
Tenants need to arm themselves with knowledge and understanding of these submarket nuances if they hope to be able to negotiate the best possible deal with landlords. In particular, smaller-sized tenants need to begin their search for sites as early as possible or risk being left with extremely limited options.
Increased supply with softer demand
Most of the 538,646-sq.-ft. delivered to the Austin industrial market in Q2 2017 was not yet occupied by tenants. Net demand has slowed the last three quarters from the pace it was at in past years, causing an uptick in vacancy. Austin’s industrial vacancy rate, measuring all space not currently occupied by a tenant, increased by 100 basis points quarter-over-quarter, from 5.9% to 6.9%. Among the major property types, Warehouse/Distribution ended the quarter at 7.3% vacancy, Manufacturing closed at less than 1% of unoccupied space, and Flex space finished at 10.6% vacancy. The North Central submarket had the highest overall vacancy rate at 8.9% and the Southwest submarket had the lowest overall vacancy rate at 2.3%. The Southwest submarket had the largest amount of vacant Flex space at 13.5%, from a total inventory of 5.2 million sq. ft., while the Northeast submarket had the most significant amount of vacant Warehouse/Distribution space at 9.7%, from 14 million sq. ft. of total stock. Manufacturing had a mere 146,327 sq. ft. out of 16.2 million sq. ft. of total inventory vacant.
Net absorption dipping into the red
Austin ended the second quarter of 2017 with negative 294,002 sq. ft. of net absorption. Flex space represented negative 159,663 sq. ft., Warehouse/Distribution space was responsible for negative 248,706 sq. ft., and Manufacturing brought in positive 114,402 sq. ft. This marks the third consecutive quarter of overall negative absorption. The major move-ins contributing to net absorption in Q2 2017 include 144,000 sq. ft. of space occupied by Flextronics, at 900 New Meister Lane in Pflugerville; 92,160 sq. ft. taken by an undisclosed tenant at 1309 Rutherford Lane; and 35,809 sq. ft. of space absorbed by Broussard Group at 15505 Long Vista Drive, in the North submarket. The major move-outs during the first half of 2017 involve UTi Worldwide moving out of 140,000 sq. ft. at Springbrook Corporate Center – Bldg 7; International Bio Medical vacating 124,071 sq. ft. at Walnut Creek #21; and Texas Linen Company, Ltd. leaving 123,607 sq. ft. at 1307 Smith Road.
Available space in current construction
There is currently about 1.4 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 second quarter 2017 were the 162,232-sq.-ft. Southpark Commerce Center – Building 3, at 54% leased; full availability of 142,800-sq.-ft. at Freeport Tech Center South – Building 2; and 124,780-sq.-ft. at Brushy Creek Corporate Center – Phase I Bldg. with 100% available for occupancy in December 2017. 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 3801 Helios Way, a 119,712-sq.-ft. building 55% occupied. Although several submarkets are active right now, the Northeast submarket has had the most space delivered with 842,507 sq. ft. during 2017. The Southeast submarket, with its improved infrastructure, proximity to the airport and accessibility to San Antonio and Houston, comes in second with 534,790 sq. ft.
Flooring Services, an interior home supplies company, is planning on relocating from Austin to a proposed $20 million facility, on a 30-acre tract in the southern section of Pflugerville’s 130 Commerce Center. The project’s first phase involves a 187,000-sq.-ft. building with office space and a large warehouse, and the second phase includes a 73,000-sq.-ft. facility for stone countertop fabrication. 130 Commerce Center is a mixed-use development located at the southwest corner of SH 130 and Pecan Street. Once completed, the facility is anticipated to accommodate 140 jobs, with an extra 60 jobs estimated within the next five years. Pflugerville ranks 12th on MONEY Magazine’s list of Best Places to Live in America in 2016, and is the 11th-fastest-growing city in the U.S, with a population of 55,000-plus.
Leasing activity in second quarter steady
Second quarter leasing activity has remained relatively unchanged from the first quarter at about 900,000 sq. ft. Flex space fulfilled 350,000 sq. ft., Warehouse/Distribution space realized about 552,000 sq. ft., while 9,000 sq. ft. of Manufacturing space was leased at Global Business Park in the Northeast submarket. Year-over-year leasing activity is down significantly from 2.2 million sq. ft. Noteworthy lease agreements signed this quarter include Evolution Salt taking 35,000 sq. ft. at 7307 Burleson Road, in the Southeast; Winding Road Racing inking a deal for 21,600 sq. ft. of direct space at 2500 McHale3 Ct., in the North; and a 20,148-sq. ft. signing by Hinkle Insulation & Drywall at 5707 Southwest Parkway, also in the North submarket.
Average full-service asking rates at all-time highs
The industrial market saw overall full-service average asking rates rise $0.56 per sq. ft. quarter-over-quarter to finish at $10.57 per sq. ft. at the end of Q2 2017. Rates for industrial real estate throughout Austin show that the Northwest submarket has the highest prices for industrial space at $13.34. The average rate for Flex space is currently highest in the Northeast submarket, at $18.20 per sq. ft.; Manufacturing rates peak in Williamson County, within the Georgetown/Round Rock submarket, at $11.50; and Warehouse/Distribution space is at its highpoint in the Northeast at $9.53. The Northeast’s upper rental rates are no surprise—the submarket is known as a location for top-tier properties in the Austin market, comprising 25 million sq. ft., one-third of the metro’s 88 million sq. ft. of industrial space.