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EXECUTIVE SUMMARY

Industrial Market

Austin’s industrial market felt a slight bump going into 2017, and ended the first quarter struggling to regain the momentum it experienced this time last year. The vacancy rate for the metro area rose to 6.1% in Q1 2017, an increase of 130 basis points quarter-over-quarter and 120 basis points year-over-year. In addition, net absorption stood at negative 134,426 sq. ft. as of the quarter’s end. Nonetheless, demand in the market has pushed rents to new highs, with the citywide average asking rate at $9.95 per sq. ft. Over 1 million sq. ft. delivered in 2017 with 33.3% availability, and there is still 1.4 million sq. ft. in the construction pipeline with 87.0% availability, which may lead the way to tougher times than the Austin industrial market has recently been accustomed to.

Austin Economy

Austin added 27,000 net new jobs, at a growth rate of 2.7% in the 12 months ending in February, making Austin the 14th-fastest-growing major metro. The Transportation, Warehousing and Utilities sector increased jobs by 5.8% (1,000 jobs), while Leisure and Hospitality increased by 4.1% (4,800 jobs). Austin’s not seasonally adjusted unemployment rate is 3.7%, up from 3.5% in January, and 3.1% one year ago. Commercial properties in Central Texas will be affected by the recent rise in property taxes, including a 23% escalation in Travis County, directly increasing building operating expenses and rental rates.

 

MARKET OVERVIEW

Net Absorption

Austin ended the first quarter of 2017 with negative 134,426 sq. ft. of net absorption. Flex space represented negative 113,971 sq. ft. of that total, Manufacturing space was responsible for positive 52,835 sq. ft., and Warehouse/Distribution space closed the quarter with negative 73,290 sq. ft. Austin’s industrial market saw negative absorption in Q4 2016 (233,982 sq. ft.) for the first time since Q1 2014, when it dropped to 711,110 sq. ft. Currently, the North Warehouse/Distribution submarket had the largest amount of negative absorption at 313,027 sq. ft. while the East Warehouse/Distribution submarket counteracted overall net absorption with the largest amount of positive absorption at 466,246 sq. ft. Tenants moving out of large blocks of space in 2017 include UTI Worldwide moving out of 140,000 sq. ft. at Springbrook Corporate Center – Bldg. 7; Brazos Forest Products LP moving out of 106,516 sq. ft. at 600 E Industrial Blvd; and Flight Director Inc. moving out of 61,766 sq. ft. at Corridor Park Pointe E. Tenants moving into large blocks of space in 2017 include Everi Holdings moving into 68,040 sq. ft. at NorthTech – 5; Busch LLC moving into 44,800 sq. ft. at Harris Ridge Business Center – Building 2; and 3-Way Logistics moving into 44,800 sq. ft. at Northeast Crossing – Bldg. 1 Harris Branch.

Availability and Vacancy

Austin’s industrial availability rate, which measures the total amount of space being marketed for lease, increased by 50 basis points quarter-over-quarter, from 9.2% to 9.7%. Among the major property types, Warehouse/Distribution ended the quarter at 8.7% availability, Manufacturing closed at 4.7% availability, and Flex space finished at 15.5% availability. Available sublease space dipped from a peak of almost 1.2 million sq. ft. as of first quarter 2016, down to 840,320 sq. ft. by the close of first quarter 2017. Across all industrial property types, available sublease space was down 28.5% year-over-year. The Far Northeast submarket had the highest overall vacancy rate at 12.3% and the Cedar Park submarket had the highest overall availability rate at 16.6%. The higher vacancy and availability rates are due in part to an ongoing large supply of Flex space on the market. A significant move-out affecting net absorption in the North submarket included previous owner, Golfsmith, vacating 139,920 sq. ft. at 11000 N IH-35, Building D.

 

Asking Rent

The industrial market saw overall average asking rates rise $0.42 per sq. ft. quarter-over-quarter to finish at $9.95 per sq. ft. at the end of Q1 2017. The average rate for Flex space is at $14.21 per sq. ft.; Manufacturing rates average $9.41; and Warehouse/Distribution space is at $7.85. Even though vacancy rates have increased, the citywide average asking rate is at an all-time high at $9.95 per sq. ft. The most significant increase in rental rates occurred for Flex properties, jumping $0.44 per sq. ft. from $13.77 to $14.21 per sq. ft. quarter-over-quarter.

Construction & Deliveries

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 first quarter 2017 were the 142,800-sq.-ft. Freeport Tech Center South – Building 2, and 124,780-sq.-ft. Brushy Creek Corporate Center – Phase I Bldg. 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 very active right now, one of the most sought-after submarkets is the Southeast. Because of its improved infrastructure, proximity to the airport and accessibility to San Antonio and Houston, the likelihood of companies relocating or expanding to the area is greater. Additionally, the affordability of the Southeast submarket is enticing to industrial owners when considering relocation.

Leasing Activity

Overall leasing activity was down quarter-over-quarter, from 2.2 million sq. ft to 800,000 sq. ft., and year-over-year from 1.9 million sq. ft. The average sq. ft. leased per quarter during the last 10 years is approximately 1.5 million sq. ft. The largest lease signings occurring in 2017 included: the 40,957-sq.-ft. lease signed by Austin Warehouse & Distribution at 2325 Ben White Blvd E in the Southeast market; the 22,581-sq.-ft. deal signed by Valence Technology Inc. at McNeil 8 in the Northwest market; and the 14,816-sq.-ft. lease signed by Monster Golf at Forest Commons Business Park – Bldg. 1 in the Round Rock market.

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