Tempering in Austin’s industrial market
Austin’s industrial market has felt continued signs of softening in the second half of 2017, and ended the third quarter facing headwinds—a turnabout from the energy it experienced this time last year. The vacancy rate for the metro area rose to 7.8% in Q3 2017, an increase of 110 basis points quarter-over-quarter and 370 basis points year-over-year. In addition, net absorption stood at negative 276,262 sq. ft. as of the quarter’s end. Even so, demand in the market has pushed the average asking rate per sq. ft. to a new high at $10.58. More than 2.55 million sq. ft. has delivered in 2017 with about 57% of that space vacant. In addition, there is still 1.1 million sq. ft. under construction with 79% available for lease, which may lead to more difficult times than the Austin industrial market has been accustomed to in the last couple of years.
Austin unemployment remains significantly below the state and national rates
The Austin economy grew at a modest pace in August. The seasonally adjusted area unemployment rate for August was 3.1%, up from 3.0% in July, and significantly below the state and national rates of 4.0% and 4.2%, respectively. Jobs in Austin were flat over the three months through August with declines clustered in professional and business services—specifically in scientific and technical services. Construction led overall job growth, while manufacturing continued to accelerate despite weakness in computer and electronics production employment. Austin inflation-adjusted gross domestic product (GDP) grew 4.9% in 2016, slightly above the average rate of 4.8% since 2001, ranking as the second-highest rate of GDP growth among all the large metro areas in the country.
Added supply with lower demand pushing vacancy up
Most of the 817,197 sq. ft. delivered to the Austin industrial market in Q3 2017 was not yet occupied by tenants. Net demand has slowed the last four quarters from the pace it was at in past years, causing an increase in vacancy. Austin’s industrial vacancy rate, measuring all space not currently occupied by a tenant, increased by 110 basis points quarter-over-quarter, from 6.7% to 7.8%. Among the major property types, Warehouse/Distribution ended the quarter at 7.9% vacancy, Manufacturing closed at 1.3%, and Flex space finished at 12.4% vacancy. The Southeast submarket had the highest overall vacancy rate at 14.9% and the Northwest submarket had the lowest overall vacancy rate at 6.7%. The Northeast submarket had the largest amount of vacant Flex space at 15.1%, from a total inventory of 6.0 million sq. ft., while the Southeast submarket had the most significant amount of vacant Warehouse/Distribution space at 9.1%, from 11 million sq. ft. of total stock. Manufacturing had a mere 1.3% vacancy rate out of 16.2 million sq. ft. of total inventory.
Net absorption still in the red
Austin ended the third quarter of 2017 with negative 278,962 sq. ft. of net absorption. Flex space represented negative 124,811 sq. ft., Warehouse/Distribution space was responsible for negative 118,702 sq. ft., and Manufacturing was at negative 35,449 sq. ft. Year-to-date net absorption sits at negative 548,563 sq. ft. The major move-ins contributing to net absorption in Q3 2017 include 117,000 sq. ft. of space occupied by Image Microsystems, at 9800 Metric Boulevard in the North submarket; 48,038 sq. ft. taken by an undisclosed tenant at 12555 Harris Branch Parkway in the Far Northeast submarket; and 45,900 sq. ft. of space absorbed at 15877 Long Vista Drive, in the North submarket. The major move-outs during Q3 2017 involve Pearson Inc. moving out of 135,442 sq. ft. at 905 W Howard Ln in Tech Ridge Five; and International Bio Medical leaving 124,071sq. ft. at Walnut Creek #21.
Ample supply of available space in active construction projects
There is currently about 1.1 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 third quarter 2017 were the 195,000-sq.-ft. Texas 2 Data Ranch at 4100 Smith School Road; and Southpark Commerce Center – Phase V, with full availability of 162,232 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 with no leasing activity to date. The Southeast submarket, with its improved infrastructure, proximity to the airport and accessibility to San Antonio and Houston, has had the most Warehouse/Distribution space delivered with 713,670 sq. ft. during 2017.
Investors on the lookout for assets to acquire
Real Capital Analytics data reports year-to-date industrial sales volume in the Austin area at $289.5 million, resulting in a year-over-year change of -21% as investors are having a harder time locating assets to acquire in Austin. The buyer composition is spread evenly across the primary categories with 30% institutional, 24% private, 24% public listed/REITs, and 21% user/other. A positive sign for the Austin industrial market during the summer was the acquisition by TA Realty, of Freeport Tech Center South at 6320 E. Stassney Lane; a 3-building 322,600-sq.-ft. industrial/flex property, from HPI Real Estate.
According to the U.S. Department of Commerce, ecommerce sales on a national level reached about $395 billion in 2016, which is a 15.6% year-over-year increase from 2015. This sharp growth in ecommerce has triggered retailers to place more importance on the transportation of merchandise from a distribution hub to their ending destination, such as Amazon Prime’s two-hour delivery, while retailers like Walmart and Target are working hard to keep up with the competition.
Leasing activity increased during the third quarter with a total of 1.3 million sq. ft. leased in the overall Austin market, an increase of about 230,000 sq. ft. from last quarter. This is in comparison to 1.8 million sq. ft. leased this time last year. Warehouse/Distribution space led the way at about 700,000 sq. ft., followed by Flex space fulfilling 285,000 sq. ft., and Manufacturing space realizing 211,000 sq. ft. In the meantime, Veggie Noodle Company is almost ready to start shelling out organic vegetables from their converted computer-chip plant in East Austin, to a new 41,000 sq. ft. factory. The local buzz reveals that it is the second-largest food manufacturing facility in Central Texas after Michael Angelo’s Inc.’s frozen Italian food factory in North Austin.
Average full-service asking rates inch higher
The Austin industrial market saw overall full-service average asking rates inch up $0.01 per sq. ft. quarter-over-quarter to finish at $10.58 at the end of Q3 2017. Rates for industrial real estate throughout Austin show that the Northwest submarket has the highest prices for industrial space at $13.91. The average rate for Flex space is currently highest in the Northeast submarket, at $15.52 per sq. ft.; Manufacturing rates peak in the Georgetown/Round Rock submarket, at $11.50; and Warehouse/Distribution space is at its highpoint in the Southeast at $9.71.
Director of Research
tel 713 275 9618