- Economic uncertainty associated with an unprecedented presidential election cycle will continue after new administration moves in due to ongoing discontent between parties.
- U.S. energy sector has likely bottomed out; real signs of recovery have emerged over the past quarter, such as increases in rig counts.
- Gross domestic product (GDP) is anticipated to be 1.4% for 2016 and 2.0% for 2017, both slower than 2.5% in 2015.
- U.S. employment remains steady, posting 156,000 new jobs in September, after 167,000 in August. Job growth below 200,000 per month suggests tightening labor market.
- The Austin metropolitan area’s GDP grew 5.9% from 2014 to 2015, the second fastest growing city in Texas, just behind San Antonio.
- Austin’s economy remains among the strongest in the state of Texas.
- Austin’s industrial market recorded 1.8 million sq. ft. of net absorption, representing large percent increases QoQ and YoY.
- Leasing activity of 886,533 sq. ft. was substantially less than historic Q3 performance.
- Availability at 8.4% was an increase of 16.7% QoQ and 5.0% YoY; vacancy at 4.6% was a decrease of -11.5% and -17.9% YoY.
- Vacancy for flex, manufacturing, and warehouse/distribution space was 7.4%, 1.2%, and 3.8%, respectively.
- Deliveries at 1.2 million sq. ft. were up 180% YoY, while construction of 1.9 million sq. ft. is up more than 200% YoY.
With a truly unprecedented election cycle and associated economic uncertainty coming closer to an end, discontent between parties will still likely hang over policy and decision makers as a new administration takes hold. Gross domestic product (GDP) is anticipated to be 1.4% for 2016 and 2.0% for 2017, both slower than 2.5% in 2015. GDP is being led by consumer spending and job gains, but weak business, government spending, and slow export sales are holding it back. Consumer spending increased strongly by 4.3% in Q2. Revolving consumer credit continued its slow but steady increase, with August showing the largest increase in 2016. Consumer interest rates remained steady. The Consumer Sentiment index moved higher in September, rising 1.4 points to 91.2, most of which came from higher income households.
Employment continues to remain steady. September posted a solid 156,000 new jobs, following 167,000 new jobs in August. Job growth remaining below 200,000 per month is suggestive of a tightening labor market. As more people entered the labor force, unemployment moved up to 5%, which historically has been considered full employment in the labor force. Also, wage growth increased by 2.6% in September, following 2.4% in August. Some analyses still suggest that the recovery is weak and as a result interest rates may stay low. With strong September job growth, and two more job reports to go, the December FOMC meeting following the election will likely result in an interest rate hike by year’s end. Nevertheless, interest rates are expected to remain low and fluctuate within a small range.
International trade continues to see slow export sales. U.S. exports are down 3.7% YoY. Yet, the negative economic impacts of falling import prices is beginning to fade, as import prices inched up 0.1% in September and are only down 1.1% relative to this time last year. The trade deficit widened modestly in August, but realized net exports are likely to make a positive contribution to GDP in Q3. Demand for U.S.-made durable goods abroad will remain weak and flat through the end of the year and increase modestly by 3-4% in 2017. These trends may stifle U.S. business investment.
The Small Business Optimism Index of the National Federation of Independent Businesses (NFIB) continued its decrease over the past 12-18 months, declining 0.3% points in September to 94.1, but remaining unchanged relative to the past six-month average. This indicates businesses are cautious on hiring and inventories. While factory orders of durable and nondurable goods rose in Q3, business investment in capital goods fell, which signaled a softer quarter. In September the ISM manufacturing index bounced firmly back into expansion territory at 51.5.
The U.S. energy sector appears to have bottomed out, and over the past quarter or so has begun to show real signs of recovery, with consistent weekly increases in rig counts being led by the Permian Basin. Nevertheless, modest increases in drilling activity and oil production does not signal the end of the persistent oversupply and large stockpiles. Recently, the Organization of the Petroleum Exporting Countries (OPEC) has agreed to agree to cut production at the next OPEC meeting, but when it still remains unclear when the global rebalance of the oil market will occur.
More people are looking to buy homes, but home availability remains low, driving up prices. Residential housing for August, in terms of sales of both new and existing homes fell, and new housing starts declined as well. Yet, this is in the context of a strong first half of 2016 where home sales and new home construction were very strong through July 2016. The Dodge Momentum Index of non-residential construction declined 4.3 percent in September to 129, but is up 5.1% YoY. Both July and August saw pullbacks in total construction momentum across residential, nonresidential, and public spending.
The Austin metropolitan area’s GDP grew 5.0% from 2014 to 2015, making it the second fastest growing city in Texas just behind San Antonio. Texas continues to have a mixed set of economic numbers in 2016, but all indications are that the bottom has come and we are now moving up. Rig count has increased every week for 15 of the past 16 weeks. While Houston technically did move into an economic recession in November of 2015, Austin remains stronger. Employment in Texas grew 2.6% in August and 3.2% in July, with an annualized increase of 0.8% for 2016 thus far. The employment forecast for Texas is 1.2% in 2016. Jobs in Austin grew at a 3% annualized rate for the three months ending in August. Job growth was broad based, with the exception of manufacturing and health and private education services. Unemployment was 4.7% in Texas.
The revenue index of the Texas Service Sector Outlook survey increased from 6.5 to 13.0 in September. Meanwhile the sales index of the Texas Retail Outlook Survey increased from -5.3 to 2.0. Factory activity in Texas did increase substantially in September, according to the Texas Manufacturing Outlook Survey. The index which measures manufacturing conditions rose 12 points to 16.7, again a substantial increase. Nevertheless, consistent with the broader U.S. economy, business conditions in Texas are mixed. The general business activity index continued into negative territory for another month at -3.7, representing almost two years in negative territory. The Austin Business Cycle Index decreased a bit to 3.0% annualized in August 2016, down from 5.5% in early 2016 and 10.2% in 2014.
Net absorption, a key metric for demand of industrial space, measures the change in occupied inventory, including direct and sublet space. Total net absorption for all products combined in Q3 2016 was 1.8 million sq. ft., yielding substantial percent increases both QoQ and YoY (Table 1, Fig 2A). The historic Q3 average (± 95% confidence interval) for net absorption is 382,957 sq. ft. (± 207,482). We are 95% certain that Q3 net absorption typically falls between 175,474 sq. ft. and 590,440 sq. ft. Net absorption in Q3 2016 was significantly greater than its average range of Q3 performance. Figure 2B breaks total net absorption down since 2004 by year and quarter for three product types: flex, manufacturing, and warehouse/distribution space. Flex saw modest increases of net absorption in Q3 2016, while manufacturing saw a key drop and warehouse/distribution a large increase in net absorption (Figure 2B).
A measure of demand that is more forward looking than net absorption is leasing activity, the total amount of space represented by direct leases, subleases, renewals, and pre-leasing. Figure 3A reports all leasing activity since 2004. Figure 3B breaks down leasing activity by year and quarter for each of flex, manufacturing, and warehouse/distribution space. Leasing activity of 886,533 sq. ft. occurred in Q3 2016, representing decreases of -40.3% QoQ and -54.1% YoY (Table 1). The historic Q3 average (± 95% confidence interval) for leasing activity is 1,587,162 sq. ft. (± 286,053). We are 95% certain that Q3 leasing activity typically falls between 1.3 million and 1.8 million sq. ft., indicating that leasing activity in Q3 was within its historic range of Q3 performance since 2004. Notably, flex, manufacturing, and warehouse/distribution all showed declines QoQ.
Vacancy and availability measure the supply of industrial space. Availability estimates total supply because it includes vacant, occupied, and sublease space. Vacancy estimates empty space on the market, whether or not that space is leased or for rent. Supply continues to remain low, but with some key increases in recent quarters (Tables 1 and 2, Figure 4). For all industrial buildings combined, availability in Q3 2016 was 8.4%, an increase of 16.7% QoQ and 5.0% YoY (Table 1). Vacancy for all industrial space combined was 4.6%, a decrease of 11.5% QoQ -17.9% YoY (Table 1).
Figure 4 shows percent availability and vacancy for flex, manufacturing, and warehouse/distribution buildings since 2004. Table 2 summarizes availability and vacancy of flex, manufacturing, and warehouse/distribution buildings for Q3 2016. In particular, note that vacancy and availability remain below historic levels for all three product types.
Figure 5 plots direct asking rents since 2006 for flex, manufacturing, and warehouse/distribution space. In Q3 2016, flex and manufacturing space continued to see a rise in direct asking rents, similar to how it has performed in recent quarters, while warehouse/distribution showed flat to modestly small increase in asking rents.
The difference between direct and sublease base asking rents for Class A buildings has decreased from $1.56 to $5.70 since 2013 (Figure 5B). Historically, Class A buildings have shown an average difference of $1.21 between direct and sublease base asking rents, with a 95% confidence interval of $0.71 to $1.72. At the current $5.70, Class A rents are outside this expected range, but the slope of sublet rents QoQ are flat to positive since 2013, indicating business expansion and a strong office market.
Historically, Class B buildings have shown an average of $-0.40 difference between direct and sublease base asking rents, with a 95% confidence interval of $-79 to $0.05. At the current $-0.40 difference, Class B rents are outside of this range, and negative, indicating a strong Class B market in which subleases are getting higher rents than direct spaces, likely due to limited supply.
Construction of new buildings is an important variable determining the supply of industrial space. “RBA Delivered” refers to completed construction, while “RBA Construction” refers to space under construction that has not yet been completed. As detailed in Table 1 and Figure 6, deliveries in Q3 2016 were 1.2 million sq. ft., representing large increases both QoQ and YoY (Table 1). RBA under construction was 1.9 million sq. ft. in Q3 2016, a decrease of -8.2% QoQ but more than a 200% increase YoY (Table 1).
Figure 7 shows changes in inventory of flex, manufacturing, and warehouse/distribution space since 2004, both for RBA and number of buildings. RBA inventory for all industrial space increased to 97 million sq. ft. for 3,966 buildings, which is an increase of 0.7% YoY (Table 1).
Information and data within this report were obtained from sources deemed to be reliable. No warranty or representation is made to guarantee its accuracy. Sources include: U.S. Bureau of Economic Analysis, CoStar, Council on Foreign Relations, Federal Reserve Bank of Dallas, Greater Houston Partnership, FiveThirtyEight.com, Houston Association of Realtors, Moody Analytics, NAI Global, National Association Realtors, Texas A&M Real Estate Center, Well’s Fargo, University of Houston’s Institute of Regional Forecasting, U.S. Bureau of Labor Statistics.