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The Austin industrial market’s overall vacancy rate dropped 30 basis points quarter-over-quarter at 7.1%, although up 50 basis points year-over-year.


EXECUTIVE SUMMARY

Vacancy drops to 7.1%
The Austin industrial market’s overall vacancy rate dropped 30 basis points quarter-over-quarter at 7.1%, although up 50 basis points year-over-year. Class A space ended the fourth quarter at 17.8% vacancy, down from 22.3% this time last year, based on a total inventory of 10.3 million sq. ft. in 102 existing industrial properties. In addition, overall net absorption totaled 849,000 sq. ft., up from the 744,000 sq. ft. this time last year. There is 11.1 million sq. ft. under construction that includes Tesla’s 4.5 million-sq.-ft. Gigafactory and Amazon’s 3.8 millionsq.- ft. distribution center, with a remaining 2.0 million sq. ft., or 18%, available for lease. Of the 2.9 million sq. ft. completed in 2020, 896,000 sq. ft. or 30% of that space is available. Triple net average monthly asking rents registered at $0.93 per sq. ft. in the fourth quarter, up from this time last quarter at $0.92 and last year at $0.85 per sq. ft.

Economic indicators
The Federal Reserve Bank of Dallas reported that the Austin economy slowed in November as the Austin Business-Cycle Index decelerated due to an increase in the unemployment rate. However, job growth was positive in most industries, and regional consumer spending since mid-July continues to hold at pre-COVID-19 levels. Austin’s unemployment rate increased to 6.3% in November, while the state’s rate rose to 8.1%, and the nation’s rate fell to 6.7%. The rise in metro and state unemployment rates was largely due to an increase in individuals reentering the labor force seeking jobs. Austin payrolls grew an annualized 7.4%, or 19,320 net jobs, in the three months ending in November. Financial activities led job expansion (25.5%, or 4,000 jobs). Financial activities and professional and business services were the only sectors to post positive job growth for the first 11 months of the year.


MARKET OVERVIEW

Net absorption
Even as last quarter registered the third-highest quarterly net absorption total in two decades at 1.7 million sq. ft., Q4 2020 recorded almost 850,000 sq. ft. which is well above the 10-year average of 497,000 sq. ft. The increase follows significant move-ins from Amazon, 3-Way Logistics, Omni Logistics, and Lowe’s—together totaling almost 700,000 sq. ft. The Austin industrial market has grown to 96 million sq. ft., expanding the metro’s inventory by 16%, or 13.1 million sq. ft. in the last five years—with demand outpacing supply in only three of the past nine quarters. Net absorption is the measure of total square feet occupied in existing buildings, (indicated as a move-in) less the total space vacated (indicated as a move-out) over a given period. The total amount of net absorption for 2020 was 3.1 million sq. ft. realized primarily in Warehouse/Distribution space at 2.6 million sq. ft., Flex space ended the year at 645,000 sq. ft., and Manufacturing space finished at negative 160,000 sq. ft.

Leasing activity slowed in Q4
Leasing velocity slowed during the fourth quarter at 1.6 million sq. ft.—down from the previous quarter’s 2.0 million sq. ft.—and less than this time last year at 2.3 million sq. ft. Top transactions during the fourth quarter included a deal for 222,800 sq. ft. at 300 Vista Ridge Dr. in Hays County; Daryl Flood Inc. signed a deal for 104,146 sq. ft. at 15833 Long Vista Drive in the North submarket; and Elon Musk’s The Boring Company, a tunnel construction firm, expanded in Texas inking a deal for 42,000 sq. ft. at 15709 Impact Way in Pflugerville. As the coronavirus pandemic continues to weigh on the larger Austin economy, the industrial asset class has remained more resilient than most.

Keeping an eye on Tesla’s $1.1 billion factory in Austin
Electric carmaker Tesla’s highly anticipated manufacturing plant is scheduled for completion in Q4 2021, with some operations possibly coming online as soon as May 2021. The company previously confirmed that the Gigafactory will produce the company’s new Cybertruck as well as the Tesla Model Y and Tesla Semi. The $1.1 billion, 4.5 million-sq.-ft. plant is expected to create 5,000-plus jobs over the next four years. Tesla’s 2,000-acre property at the intersection of SH 130 and Harold Green Road in the East submarket of Austin is showing significant site development.

Investment sales trends
Real Capital Analytics data reports industrial sales volume for Q4 2020 in the Austin area at $228.3 million, up from last quarter at $108.0 million. The primary capital composition for buyers in 2020 was made up of 43.3% private and 30.2% cross-border investors (a transaction is defined as cross-border if the buyer or major capital partner is not headquartered in the same country where the property is located). For sellers, the largest percentage was 65.9% private investors, and 29.1% institutional.

Japanese company CKD acquires industrial space
CKD USA Corp., purchased a 50,000-sq.-ft. industrial building recently at 4401 Supply Court, just west of the Austin-Bergstrom International Airport. Gov. Greg Abbott had recently announced CKD had picked Central Texas for its first U.S. production site. Industrial space is in high demand right now, especially as ecommerce grows amid the COVID-19 pandemic. CKD plant operations are expected to begin in fall 2021 in the Burleson Industrial Park. Troy Martin of NAI Partners represented CKD in the deal, and CBRE represented the seller, Eagle Burleson Park LLC.

Average asking NNN rent increases
Monthly rental rates for the entire Austin industrial market on average was $0.93 per sq. ft. as of the end of 2020. That is up slightly quarter-over-quarter from $0.92 per sq. ft., and also an increase year-over-year from $0.85. The monthly average rate for Flex space is currently at $1.24 per sq. ft.; Manufacturing rates are at $0.66; and Warehouse/Distribution space sits at $0.80. The Northwest ($1.38 PSF) and Southeast ($1.05 PSF) submarkets currently have the highest monthly overall average rate, followed by the Northeast ($0.92 PSF). With the rising costs to developers that are bringing new projects with high quality space to the market, rental rates could remain elevated.


Leta Wauson
Director of Research
leta.wauson@naipartners.com
tel 713 275 9618

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