Russell Todd, Centric Commercial/CORFAC International
Austin is happening. The city was ranked No. 1 for small business growth by Forbes.com and No. 1 in Kiplinger Finance Magazine’s “10 Best Cities for the Next Decade.”
Steady population growth has created demand for virtually all real estate product types in Austin. While the office market and vertical condo developments grab most of the headlines, the regional industrial real estate market has recovered significantly from the recession and is expanding in lock step with the overall economy.
The Texas capital is now the 11th most populous city in the U.S. and the fourth largest in Texas. From a population of 132,459 in 1950, the city grew to 465,622 in 1990, 656,562 in 2000, 790,390 in 2010 and an estimated 865,504 today. More new industrial product was delivered in Austin last year, approximately 675,000 square feet, than any year since 2008.
Another 550,000 square feet of industrial property is expected to deliver this year. In a market of 46 million square feet in total, these are robust years for industrial development. Net absorption for the year was 376,279 square feet, according to Xceligent. While positive, it was substantially less than the 887,544 square feet of net absorption in 2013. Approximately 320,000 square feet of the total absorbed in 2013 was space vacated by Dell and its suppliers.
Big Projects on the Horizon
Clarion Partners delivered the biggest chunk of space last year – Heritage Crossing in the north submarket. Heritage is 450,000 square feet of multi-tenant, pure industrial product with availability from 25,000 square feet and up. The other significant delivery was in Pflugerville, a city located between Austin and Round Rock, where a local developer added 120,000 square feet to Pecan 130 Commerce Park.
With about 240,000 square feet already existing, the park has capacity to reach 720,000 square feet when fully built out. The Pflugerville Economic Development Corp. has been aggressive with incentives, contributing capital toward infrastructure projects, payments to employers for certain jobs, property tax rebates and abatements on land improvements to attract businesses and jobs.
The biggest project currently under construction is a 150,000-square-foot development by HPI, the largest commercial real estate developer in central Texas, at Harris Ridge.
Low Vacancy Spurs Growth
With a vacancy rate hovering around 10 percent, one would think we have a market nearing equilibrium. That isn’t the case, however, because of an extremely limited supply of available buildings under 20,000 square feet.
Smaller buildings are Austin’s sweet spot and occupancy has been driven up by a very active housing industry. Included with the growth in housing is demand for building supply companies, flooring companies, granite/marble companies and the like to take up smaller buildings and subdivided facilities.
However, there were two large leases in the fourth quarter of last year, both in spaces that were associated with Dell. Mattress Firm took 99,200 square feet in Corridor Park’s Building 9. It was space that was vacated by a logistics firm that served Dell.
In the other large deal, Allergan leased 87,754 square feet at Tech Ridge, which had been a manufacturing facility for the computer company. There were two notable sales in 2014. GE Capital sold a 3 million-square-foot Austin portfolio to IndCor, the industrial real estate arm of Blackstone Group LP, as part of a multi-market, 10 million-square-foot portfolio.
Also, West Mount Capital bought 13 buildings totaling approximately 537,000 square feet. The seller in the second deal was a partnership between Endeavor Real Estate Group and Granite Properties. Not surprisingly, the positive market momentum and declining vacancy rates have led to increases in rental rates by a factor of 10 percent in each of the last two years, and average rents are nearly on par with pre-recession rates.
Flex space, which accounts for about 19 million square feet of the overall market, is leasing from $0.75 to $1.25 per foot, triple net, while newer industrial space is going for $0.50 to $0.55 per square foot with $5 to $7 per foot tenant-improvement (TI) allowances, in which the landlord commits to making property improvements prior to the new lessee’s scheduled occupancy.
TIs could be repainting, refreshing landscaping or installing new carpet in office areas.
Older warehouse and distribution space rents for only slightly less, with asking rents ranging from $0.40 to $0.50 per foot. Xceligent reports the citywide average triple net rental rate for industrial space increased from $0.73 per square foot at the close of 2013 to $0.82 per square foot at the close of 2014.
Looking ahead for the remainder of the year and into 2016, we expect rental rates to continue to rise, particularly as the market for industrial space under 20,000 square feet remains extremely competitive.
With Austin land and development costs significantly higher than our neighbors in Dallas, San Antonio and Houston, the cost to develop the type of new product the market is clamoring for is still greater than the leasing market will support.
However, as long as the Texas economy continues to thrive and we experience steady population growth, it is only a matter of time before the economics make sense to add inventory for smaller owners and occupiers of industrial space.
— By Russell Todd, principal, Centric Commercial/CORFAC International. This article first appeared in the March 2015 edition of Texas Real Estate Business. Andy Swanson and Rob Wendt with Centric Commercial/CORFAC International contributed to this article.