Keep Austin…occupied

 

The Austin industrial market’s overall vacancy rate rose to 8.1% during the third quarter of 2019, an increase of 20 basis points quarter-over-quarter, and 200 basis points year-over-year. Class A space ended the quarter at 24.7% vacancy, up from 16.6% this time last year, based on a total inventory of 8.4 million sq. ft. in 87 industrial properties.


EXECUTIVE SUMMARY

Plentiful supply of industrial product

The Austin industrial market’s overall vacancy rate rose to 8.1% during the third quarter of 2019, an increase of 20 basis points quarter-over-quarter, and 200 basis points year-over-year. Class A space ended the quarter at 24.7% vacancy, up from 16.6% this time last year, based on a total inventory of 8.4 million sq. ft. in 87 industrial properties. In addition, net absorption remained positive for the ninth consecutive quarter, totaling 429,000 sq. ft., accelerating from 79,000 sq. ft. this time last quarter. New supply delivered to the market in 2019 stood at 2.3 million sq. ft., with 43% of that space available for lease. There is an additional 1.3 million sq. ft. under construction, with 27% already spoken for. Triple net average monthly asking rents remained the same during the third quarter at $0.87 per sq. ft.—a continued all-time high—increasing from $0.82 per sq. ft. this time last year.

Tight Austin labor market persists

The Austin metro realized a 3.4% annualized increase in jobs during the three months ending in August. Most job sectors experienced payroll gains, with professional and business services growing 9.0%, adding approximately 4,300 net jobs. Trade, transportation, and utilities grew by 8.7%, adding 3,800 net jobs; and leisure and hospitality rose by 6.8%, totaling 2,250 net jobs. The tight labor market persists as Austin’s unemployment rate remained at 2.7% in August, and unemployment rates for the U.S. at 3.7% and Texas at 3.4% were unchanged from the prior two months.

 

 

MARKET OVERVIEW

Vacancy up at 8.1%

Austin’s industrial vacancy rate, measuring all space not currently occupied by a tenant, stood at 8.1%, up from 7.9% in the second quarter, and 6.1% year-over-year. Among the major property types, Warehouse/ Distribution ended the quarter at 9.2% vacancy, Manufacturing closed at 2.9% of unoccupied space, and Flex space registered at 9.1%. Vacancy in the Austin industrial market has averaged 6.3% during the last five years (Q3 2014). There is currently an ample supply of space in the Austin area industrial market, including the 1.3 million sq. ft. under construction—72.6% of which is available for lease.

Net absorption remains positive

Net absorption has remained positive for a ninth consecutive quarter, totaling 429,000 sq. ft. for Q3 2019. Spaces that have become vacant during the quarter include 48,531 sq. ft. in Vista Business Park in the North submarket; 46,200 sq. ft. at 9019 Tuscan Way in the Northeast submarket; and 34,538 sq. ft. in NorthTech Business Center in the Northwest submarket. Spaces that are no longer available for lease include 89,332 sq. ft. in Southpark Commerce Center V in the Southeast submarket; Western Industrial moving into 79,975 sq. ft. in Hutto in the Georgetown submarket; and Goodwill occupying 61,440 sq. ft. in Global Business Park in the Northeast submarket.

Red Bluff modern-industrial mixed-use

Construction on the Red Bluff mixed-use development at 4713 E. Cesar Chavez St. will begin in Q1 2020. A metal warehouse for auto repair is currently on the site south of Red Bluff Road—an area known for an abundance of industrial warehouses for as far back as can be remembered. The upcoming Red Bluff development should change the atmosphere in the neighborhood noticeably. East Austin has been referred to as more desirable than downtown with more affordable rents and more available parking with hopes of attracting more office and retail tenants to the area.

More industrial space in Round Rock

Texas Beauty Labs is expected to move into 44,386 sq. ft. of space at Settlers Crossing’s Building 1 in Q4 2019, housing it’s research and development labs, manufacturing facility, warehouse and corporate offices. Recently acquired by Phlur Inc., Texas Beauty Labs manufactures personal care products using natural and organic ingredients. As part of an incentive agreement, Phlur will lease the facility, spend at least $2.65 million on facility improvements and personal property and create 35 new jobs over five years. Settlers Crossing’s 159,570-sq.-ft. first phase, which consists of Buildings 1 and 2, is occupied except for 17,000 sq. ft. in Building 2. The second phase, 97,518-sq.-ft. Building 3 and 75,277-sq.-ft. Building 4 is under construction. Other Settlers Crossing tenants include Chatsworth Products (information technology), C-Serv (furniture installation and logistics) and AYRO (energy-efficient vehicles).

Investment sales trends

Real Capital Analytics data reports Q3 2019 industrial sales volume in the Austin area at $692.8 million compared to Q2 2018 at $256.9 million, resulting in a significant year-over-year quarterly volume increase. The primary capital composition for buyers in the third quarter of 2019 was made up of 59.8% institutional investors, 35.1% private and 5.1% 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 majority was 57.1% cross-border, 14.7% REIT/listed, and 13.5% institutional.

Austin’s Silicon Hills area campus sold

In the third quarter of 2019 Equity Commonwealth sold Research Park, a 1.11 million-sq.-ft. industrial and flex development as well as 94.8 acres of undeveloped land in the Northwest submarket. Parmer Innovation Centers purchased the assets. Research Park is located on 188 acres off US 183 at 12455 and 12515 Research Boulevard in the technology triangle, the birthplace of “Silicon Hills.” The area is home to Apple, Amazon, Facebook, Indeed, Expedia, Visa, and Charles Schwab, as well as manufacturing giants Samsung, National Instruments and Flextronics America. Commonwealth Equities sold Research Park for a gross price of $165.5 million, reported from a press release by the company.

Asking NNN rates continue to climb

The industrial market in the Austin area saw triple net average monthly asking rents remain at $0.87 per sq. ft.—a continued record high—at the end of Q3 2019. Using the same metrics, the price to rent Warehouse/ Distribution space increased slightly, Manufacturing space remained the same, while Flex rent decreased, bringing the overall monthly average rent up to $0.06 from $0.82 per sq. ft. this time last year. Rates for industrial real estate throughout Austin shows that the Northwest and East/Southeast submarket have the highest asking prices for industrial space at $1.02 per sq. ft. The average rate for Flex space is currently highest in the East/Southeast at $1.24 per sq. ft.; Manufacturing rates peak in the Georgetown/Round Rock submarket, at $1.50; and Warehouse/Distribution space is at its highest in the East/Southeast at $0.90.