Q4 2016 Austin Industrial Market Report

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Executive Summary   

Economy

  • The 115th Congress is expected to see new policies and possible changes in the repeal/replace of Affordable Care Act, corporate and individual tax cuts and reforms, increased infrastructure spending, and trade policy and regulations.
  • With increases in oil prices and rig counts, the energy sector has likely passed its bottom, and national, regional and local signs indicate a positive but bumpy improvement ahead.
  • Gross domestic product (GDP) is anticipated to be 1.6% for 2016 and 2.1% for 2017, both slower than the 2.6% measure seen in 2015.
  • U.S. employment remains steady in posting 156,000 new jobs in December, for a total of 2.2 million new jobs in 2016 (an average of 180,000 new jobs per month); though still strong, 2017 is anticipated to see a slightly lower 160,000 new jobs per month.
  • While Austin’s economy continues to expand, the rate of that expansion slowed last year.

Industrial Market 

  • For the second time since 2011, Austin’s industrial market recorded negative net absorption (-207,550 sq. ft.) in Q4, representing large percent decreases QoQ and YoY.
  • Leasing activity in Q4 of 1,088,354 sq. ft. was down -53% YoY.
  • Vacancy of 4.8% in Q4 was flat YoY; availability at 8.7% increased 17.6% YoY.
  • Vacancy for flex, manufacturing, and warehouse/distribution space were 8.1%, 1.4%, and 3.9%, respectively.
  • Deliveries and construction remain positive, increasing YoY for the past several years for flex and warehouse/distribution space, but flat for manufacturing.

 

Figure 1

Table 1


Economic Overview

National Economy

    As the 115th Congress began alongside a new president-elect, some new policies and policy changes that may unfold include repealing/replacing the Affordable Care Act, corporate/individual tax cuts and reforms, increased infrastructure spending, and among others trade policy and regulations. Despite a very vibrant political cycle with some clear consequences, Trump’s election is not anticipated to influence gross domestic product (GDP) in 2017, which is expected to be about 2.1%. GDP may roll in for 2016 around 1.6%, lagging behind 2.6% in 2015. Proposed tax cuts tend to mostly lead consumers to reduce their debt, rather than increase consumer spending, which accounts for about two-thirds of GDP. Consumer spending did grow by 2.8% in the third quarter of 2016.

    Job growth continues to be a strength of the U.S. economy. Employment in December increased by 156,000 new jobs, with particular strengths in health care, hospitality, government and manufacturing. In 2016, there was an average of about 180,000 new jobs added per month, for a total of 2.2 million new jobs and an unemployment rate of 4.7%. Job growth in 2017 is anticipated to slow but remain strong at around 160,000 new jobs per month. Increases in job openings and turnover further suggest a tightening labor market. Nevertheless, with more people entering the labor force, unemployment is expected to drop to 4.5% in 2017. Strong employment and job growth are big contributors to the likely two-to-three interest rate hikes anticipated to occur by the Federal Reserve in 2017. Personal income also rose in every state in Q3 2016.

    Core inflation, excluding food and energy, is projected to be about 2.3% in 2017, a modest increase from 2.2% in 2016. However, energy prices are likely to increase modestly in 2017, for an overall 2.5% inflation in 2017, up from 2% in 2016. The question remains as to whether OPEC’s cuts will really manifest and if so, how much they will lead to the stabilization and increase in oil prices and the energy sector. Either way the oversupply of production and stored oil still persists and needs to be burnt off for WTI prices to see substantial shifts upward. The oil markets are likely to remain volatile in 2017, possibly stabilizing some during the latter half of the year.

    Business spending was largely flat in 2016, but a modest increase of 3-4% may occur in 2017. Demand for factory-produced goods continues to strengthen after a lengthy lull. The Small Business Optimism Index of the National Federation of Independent Businesses (NFIB) increased substantially by 7.9 points in December and 10.9 points in November, following decreases over the past 12-18 months. Such positive swings indicate an expected stronger economy associated with possible easing of regulations. The ISM manufacturing index rose to 54.7, a two-year high on the heels of increases in production and new orders in December. In December, the ISM non-manufacturing index was unchanged at 57.2.

    Indicators such as residential construction suggest that the housing market will strengthen in 2017, despite substantial drops in housing starts in November 2016. Inventory remains low, with more people looking to buy homes than are readily available. With political headwinds in 2016 in both the U.S. and U.K. leading to uncertainty, growth in private nonresidential construction spending is anticipated to be about 7.5% in 2016. The Dodge Momentum Index of non-residential construction increased 2.9% in December after downward revisions for November.

    Export prices are expected to increase with the strong value of the dollar, which in turn will produce an anticipated increase in U.S. trade deficit by 4% in 2017. Meanwhile, import prices rose 1.8% in 2016. Though all data are not yet in, it appears that international trade in 2016 will fare better than initially anticipated with the shortfall on par with that of 2015. Retail sales were weaker overall than hoped for in December, marking an increase of 0.6% in December following 0.2% in November (compared to expectations of 0.5%). 

Austin and Texas Economy

    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.

    Employment in Texas grew 2.1% in the second half of the year, compared to just 0.8% in the first half of the year. Overall, Texas employment will be about 1.5% for 2016, with a forecast of growth near 2.1% for 2017. Austin jobs grew 0.6% annualized from August to November, with strengths in leisure and hospitality, health and private education services, and financial activities, but continued weakness in manufacturing and construction and mining associated with oil and oil service fields. Job growth in November alone was 2.2% and unemployment 3.0%, both stronger than state and national levels. While Austin’s job growth is generally greater than the state of Texas, the six-month average fell behind Texas in November for the first time since 2008.

    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.


Market Overview

Net Absorption

    Net absorption, a key metric for demand of industrial space, measures the change in occupied inventory, including direct and sublet space. For all products combined, Q4 2016 recorded negative net absorption of -207,550 sq. ft., yielding decreases of -112.4% QoQ and -128.9% YoY (Table 1, Fig 2A). The historic Q4 average (± 95% confidence interval) for net absorption is 523,130 sq. ft. (± 296,264). We are 95% certain that Q4 net absorption typically falls between 226,865 sq. ft. and 819,394 sq. ft. Net absorption in Q4 2016 was significantly lower than its average range of Q4 performance. Figure 2B breaks total net absorption down since 2004 by year and quarter for flex, manufacturing, and warehouse/distribution space. Flex saw modest increases of net absorption in Q4 2016, while manufacturing saw a key drop and warehouse/distribution a large increase (Figure 2B). Total annual net absorption for 2016 was 1.8 million sq. ft., making 2016 the third-best year for demand for industrial products since the 2008/2009 economic recession.

Figure 2

Leasing Activity

    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 1,088,354 sq. ft. occurred in Q4 2016, representing decreases of -10.1% QoQ and -53.3% YoY (Table 1). The historic Q4 average (± 95% confidence interval) for leasing activity is 1,437,856 sq. ft. (± 332,398). We are 95% certain that Q4 leasing activity typically falls between 1.1 million sq. ft. and 1.8 million sq. ft., indicating that leasing activity in Q4 was just below its historic range of Q4 performance. Most notable was the continued decline in leasing activity of flex space. Total leasing activity for 2016 was 5.0 million sq. ft., a drop from 2015 and the lowest level since 2010, but well within historical annual activity. With net absorption lagging behind leasing activity, lower leasing activity in 2016 suggests lower net absorption in quarters to come.

Figure 3

Availability and Vacancy

    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 flex and to a lesser extent warehouse space over recent quarters (Tables 1 and 2, Figure 4). For all industrial buildings combined, availability in Q4 2016 was 8.7%, an increase of 6.1% QoQ and 17.6% YoY (Table 1). Vacancy for all industrial space combined was 4.8%, an increase of 9.1% QoQ but no change 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 Q4 2016. In particular, note that vacancy and availability remain below historic levels for all three product types.

2016-Q3-Hou-office-Fig4

Asking Rent

   Figure 5 plots direct asking rents since 2006 for flex, manufacturing, and warehouse/distribution space. In Q4 2016, flex space continued to see a rise in direct asking rents, similar to recent quarters, while warehouse/distribution showed little to no change in asking rents. Manufacturing saw a small dip in its asking rents.

Figure 5

Construction

   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 Q4 2016 were 192,000 sq. ft., representing a large decrease of-84.6% QoQ but an increase of 27.3% YoY (Table 1). RBA under construction was 2.0 million sq. ft. in Q4 2016, an increase of 5.6% QoQ and 14.7% YoY (Table 1).

Figure 6

Inventory

   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 98 million sq. ft. for 4,011 buildings, which is an increase of 1.1% YoY (Table 1).

Figure 7

 

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.

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