By Troy Martin
Austin’s industrial market continues to play the same song and dance of tight supply and increasing rents. In Q1 2017 there was a slight loosening of supply as available space moved up 120 basis points from 4.8% to 6.0%, yet quoted rates for the greater Austin Metro area still rose 2.1% quarter-over-quarter from $9.31 per sq. ft. to $9.51 per sq. ft. Tenants would of course like to see some relief in the tempo of price increases in 2017 but, barring an unforeseen economic event, a decline seems unlikely.
Austin closed out the first quarter of 2017 with 99.5 million sq. ft. of total inventory. (22.75 million sq. ft. of which was flex space). 2.0 million sq. ft. of industrial space delivered to market in 2016 and another 1.2 million sq. ft. delivered in Q1 2017. Most of the latter number comes from one single project: the Capitol Wright Distribution Center, a 500,000-sq.-ft. owner/occupier beer distribution facility in east Austin that came online in February 2017. A further 1.55 million sq. ft. of industrial space is currently under construction with 1.1 million sq. ft. of that amount expected to deliver in Q2 2017. An additional 5.56 million sq. ft. of industrial space is in the proposal phase of development.
These construction and delivery figures boosted industrial space in the Austin metropolitan area by 2.1% in 2016, followed by 2.9% growth in 2017. While these are positive indicators, it seems likely that the growth for demand in industrial product will at least match, and most likely slightly outstrip, that of supply. Austin’s population is expected to increase by 2.5% in 2017 and business expansion should continue as GDP is forcasted to rise at an even higher multiple of population growth.
Driving the increase in supply is large multi-tenant facilities in the Southeast (between South Austin and the Austin-Bergstrom International Airport) and the Far Northeast (effectively Pflugerville) submarkets. In the overall Austin Metropolitan area, 8.2 million sq. ft. of industrial space is either under construction or in the proposal phase. Of that future supply, 5.2 million sq. ft., or 61%, comes from just 12 projects in those two geographic submarkets.
This may well result in a diverging market between facilities for larger tenants who will have better options and smaller tenants who will increasingly be squeezed. The larger tenants who can take down 40,000-sq.-ft.-plus spaces in a classic Class A tilt-wall multi-tenant site will hopefully have reasonable options, especially in the highly desirable SE and Far NE locations where toll roads and east-west freeways make for improved access and transit. Smaller tenants in the sub-20,000-sq.-ft. range could face not only increasing rents but also a marked decrease of options, especially in the core central Austin area where industrial facilities are increasingly being torn down for multi-family/mixed-use development or repurposed to office or retail product.