REBusinessOnline

Last-Mile Status Makes Austin Ripe for Larger Industrial Development

Park-35-Buda

Exeter Property Group is developing Park 35, a 305,768-square-foot warehouse in Buda. With a cross-dock configuration, 32-foot clear heights and 40 trailer parking spaces, the property has many of the features that today’s distribution uses demand.

Even before the city’s population growth began exploding and its reputation as a tech hub became entrenched, Austin was always a true last-mile market for industrial users. 

Now that e-commerce has morphed into a worldwide phenomenon with real staying power, Austin looks like one of the next ideal locations for institutional industrial developers to make their marks with larger projects. 

Leigh Ellis, AQUILA Commercial

However, the market does present a handful of challenges, including an intricate entitlement process, expensive land and a slightly higher cost of construction as compared to Texas’ other major markets. These barriers to entry have helped characterize the Austin industrial market we see today, with local developers leading the way.

The Austin Market Today

From both a developer’s and a broker’s perspective, the biggest advantage of being in a high-barrier-to-entry market, aside from less competition, is that the likelihood of becoming overbuilt is minimized. 

We saw this in 2008 and 2009, when the recession forced industrial users to cut operating costs and landlords to lower rents. Like the rest of the country, Austin took some hits during the Great Recession and saw a handful of properties foreclosed upon. But due to minimal new development, the market was able to maintain some flexibility, and Austin came out relatively unscathed compared to similarly sized markets in other parts of the country. 

The relative lack of new supply during this time ensured that users wouldn’t simply be able to relocate their operations to cheaper spaces, and that little construction debt would turn delinquent. Fundamentals took a hit during the Great Recession, to be sure, but a balanced level of inventory undoubtedly mitigated the impacts. 

According to the latest data from CoStar Group, the Austin area added just 2.5 million square feet of new industrial product in 2018, down from 3.1 million square feet in 2017. CoStar projects that similar volumes of new supply will be added to Austin’s inventory over the next three years. 

The magnitude of inventory growth reflects the fact that Austin is and will likely continue to be a secondary market best suited to smaller industrial users; the typical size of an industrial lease in Austin is about 30,000 to 40,000 square feet. This is due to the nature of the tech industry and the types of business that surround it. For example, semiconductor manufacturers are among the biggest industrial users servicing the tech industry. These users need the ability to scale quickly and easily in both directions during busy and slow seasons.

Over the last several years, strong population growth throughout the Austin area, combined with the rapid rise of e-commerce, has driven greater demand for industrial space. Robust demand paired with a modest pipeline has led to annual rent growth of about 6 percent during this period. 

CoStar projects the metro’s vacancy rate will hold steady at approximately 7 percent, though overall rents are projected to increase by 5 percent in 2019 from roughly $10.97 per square foot to $11.52 per square foot. 

Because most absorption in Austin’s industrial market is driven by tenants with footprints under 100,000 square feet, we expect demand for multi-tenant light industrial product to stay high. This product type should also see the greatest rental growth within the Austin industrial market as a whole in 2019. 

Where It’s Headed

There are few e-commerce facilities or big box distribution centers in the area beyond Amazon’s 855,000-square-foot fulfillment center in San Marcos. But there are several indicators that suggest that could change in the next 10 to 15 years. 

In the wave of development in 2014 and 2015, we saw institutional developers beginning to build within the market, including Trammel Crow, Clarion and Ridge. Currently, we’re seeing a new wave of development in the southern suburbs, which is unprecedented in the Austin industrial market. 

Institutional developers are building large-format distribution centers at an unprecedented scale in the Austin market. Some developers are testing the waters with larger projects in submarkets like Buda and Kyle, which enjoy immediate proximity to the Interstate 35 corridor.

Philadelphia-based Exeter Property Group is developing a 600,000-square-foot speculative project in Buda, with Phase I nearing completion. Just a few miles down the road, Majestic Realty Co. recently broke ground on Kyle Crossing Business Park, a 535,113-square-foot project that is expected to be complete by the third quarter. 

It will be very interesting to see how these assets perform, as they are bellwethers of this region’s potential to become a major last-mile distribution hub. Once these distribution centers gain momentum, we’re likely to see industrial development break open and an influx of new players enter the market. 

Deal Spotlight

Amazon recently added to its local footprint, leasing 100,000 square feet in southeast Austin. An undisclosed building materials company is opening an 80,000-square-foot e-commerce facility at Springbrook Corporate Center in the northern suburb of Pflugerville. Goodwill Industries took down 30,720 square feet at Global Business Park on the city’s north side.

Travis Association for the Blind is another tenant that represents a key trend in the market: users often expand through smaller individual spaces rather than one large facility. The organization started with a 10,000-square-foot space and now occupies more than 800,000 square feet in multiple buildings on the city’s southeast side, including a 500,000-square-foot build-to-suit.

— By Leigh Ellis, principal, AQUILA Commercial. This article first appeared in the March 2019 issue of Texas Real Estate Business magazine.

Get more news delivered to your inbox. Subscribe to France Media's e-newsletters. Click here.



Related News

Conferences