Constraints in Austin Push Distribution South, Bolstering San Antonio’s Market
Less than 100 miles along Interstate 35 separates downtown Austin from downtown San Antonio. But thanks to strong job and population growth throughout the region, that short stretch is becoming home to two industrial markets that occupy distinctively different, yet thriving, niches in the local economy.
The CliffsNotes version of this story is that Austin is trending toward servicing smaller, local tenants with ties to the tech sector, while San Antonio is moving toward being a regional distribution market for larger, nationally known users. Both markets are tight: the vacancy rate for both Austin and San Antonio is between 5 and 6 percent and both are seeing very healthy tenant demand and absorption of many current and planned developments.
But to understand how the markets have come to function so differently from one another, we must consider the key driving factors in each metro.
Austin: Access & Availability
Developing new industrial space in Austin — an industrial market with about 79 million square feet of product, according to JLL’s research — is rife with challenges.
The entitlement and zoning processes are exceptionally time-consuming, and most infill land sites are priced at levels that make new construction economically implausible. But the tightness of the industrial market has driven rents skyward. Industrial users in Austin typically pay asking rents that are twice as high as those for properties of a comparable size in other Texas markets. The average asking rent for spaces between 10,000 and 30,000 square feet is more than $10 per square foot.
In addition, industrial users in Austin, the renowned tech capital of the Southwest, tend to demand a higher percentage of office in their industrial spaces. The skyrocketing office rents in the CBD have caused a “flight to flex,” which adds to the increase in the office percentage of industrial buildings with historically lower finishes. To meet that demand, industrial developers and investors in Austin are converting older product into flex spaces with anywhere from 30 to 50 percent office finishes.
In general, these properties are also being retrofitted to accommodate research and development uses as opposed to traditional storage and distribution modalities. The uniqueness of this requirement, which is a function of Austin’s tech-driven economy, allows developers and owners of this product type to push rents more aggressively on well-capitalized tenants. Users that don’t fit that bill get pushed out.
So to recap, a shortage of desirable sites, combined with specific needs for office and R&D spaces, has pushed industrial rents in Austin to unprecedented highs. These forces have driven more traditional users to look south of Austin into new markets (such as Buda, Kyle, San Marcos and New Braunfels).
The upshot is that investors love Austin as a long-term industrial growth market, driven by sustained rent growth and unsinkable confidence in the tech sector. Investors that have been priced out of Dallas and Houston are also looking at Austin more and more.
SA: Distribution Destination
The San Antonio industrial market totals roughly 92 million square feet. Of that space, about 30 percent is geared toward manufacturing, a significantly higher percentage than Austin. In addition, the San Antonio MSA offers a strong supply of industrial labor.
These factors have been instrumental in San Antonio’s slow rise as a distribution hub. But equally important is the metro’s basic geography and infrastructure. The vast majority of product coming from Mexico and South Texas comes through the I-35 corridor. Proximity to Interstate 10 also offers distributors direct access to Houston and the various markets of West Texas.
All told, distribution users utilizing San Antonio as their hub can service about 20 million-plus people with deliveries. In addition, the San Antonio MSA is an attractive market for distribution because it boasts the nation’s fastest overall rate of population growth — roughly 65 new residents per day.
Development of new industrial properties in San Antonio reflects the metro’s move toward becoming a regional distribution center. Record demand from big box tenants is evidence that national users have taken notice of the logistic advantages provided by San Antonio’s location.
To that end, tenants have demonstrated a recent flight to high-quality, Class A industrial product. New developments in San Antonio contain state-of-the-art clear heights, truck courts and fire suppression systems on par with similar projects in the nation’s largest MSAs — all features that attract e-commerce and other distribution-oriented users.
Historically, Texas has been viewed as a secondary market for most institutional capital seeking industrial investment opportunities.
With the DFW metroplex having established itself as a top 5 industrial market in the nation and Houston quickly pushing into the top 10, San Antonio and Austin are increasingly seeing the downstream benefits with continued yield compression and more capital sources focused on growing their industrial allocations in Texas. Coupled with the state’s central location and attractive business environment, Texas has emerged as one of the most desirable regions for investors to place capital.
Significant increases in job gains and growing populations in our major metros, including Austin and San Antonio, are leading tenants to ensure they have a presence to raise the quality of service for their customers and clients. These factors provide ample opportunities for potential investors and developers, much to the benefit of everyone who lives within the state. It’s all part of the powerful Texas economic engine.
— By Dustin Volz, executive vice president, JLL. This article first appeared in the September 2018 issue of Texas Real Estate Business magazine.