By Joe Iannacone, senior vice president, Titan Development; and Omar Nasser, senior vice president, AQUILA Commercial
The Central Texas industrial market stretches between Austin and San Antonio along the Interstate 35 “Innovation” Corridor, an approximately 80-mile expanse that encompasses some of the fastest-growing cities in the nation.
Joe Iannacone, Titan Development
Austin, now the 10th-largest city in the nation population-wise, continues to see unprecedented growth in the tech, e-commerce and household industry sectors.
Most notably, Tesla decided to construct its Cybertruck Gigafactory in East Austin along State Highway 130, which has and will be a boon to the region. The electric car maker also recently announced plans to relocate its headquarters from Silicon Valley to Austin.
San Antonio, the nation’s seventh-largest city, has seen continued growth in the automotive, financial, life sciences and food and beverage sectors. Large companies continue to flock to the region to establish a major presence, including USAA, H-E-B and Toyota.
The markets in between Austin and San Antonio from south to north — Schertz, New Braunfels, San Marcos, Kyle and Buda — have benefitted from the synergies of both markets due to their location and strong economies. As a result of the continued economic activity and with the effects of COVID-19, industrial development and leasing activity has been exceptionally strong over the last several quarters in both markets.
Omar Nasser, AQUILA Commercial
Overview
The Austin and San Antonio industrial markets are both similar in size — around 60 million square feet of both industrial and flex buildings. Historically, the San Antonio industrial market has consisted of mostly bulk distribution buildings that feature higher clear heights, deeper truck courts and large trailer parking capacity.
San Antonio serves as a larger distribution market due to its closer proximity to Mexico, and tenants require bigger buildings and larger truck courts for their distribution requirements. The average tenant footprint in San Antonio is around 50,000 to 60,000 square feet but has grown since the onset of COVID-19 and the associated growth of e-commerce.
In contrast, Austin’s industrial market has historically comprised shallower-bay flexier buildings with lower clear heights, many of which are climate controlled due to the heavy tech and research and development (R&D) influence in the market. The average user footprint in Austin is around 40,000 to 50,000 square feet, but that has also expanded drastically since the Tesla CyberTruck factory was announced.
The industrial markets are evolving in both cities due to the COVID-induced acceleration of online shopping. Austin is starting to mimic San Antonio’s bulk distribution activity, with new projects being developed with higher clear heights and increased trailer parking. Moreover, the pandemic and its associated effects have caused the average tenant sizes in both markets to grow drastically.
Growing Demand
Ever since the Tesla Gigafactory groundbreaking in 2020, the Austin market has seen increased demand stemming from Tesla and its vendors canvassing the market for space. Many of these companies manufacture and supply parts directly to Tesla, while some are distribution and third-party logistics (3PL) companies servicing the car giant. The surge of new development in the Austin area aims to take advantage of much of this new anticipated activity in the market.
Tesla vendors and suppliers looking for space in the cities surrounding Austin have also considered San Antonio for their industrial space needs. These vendors don’t necessarily need to be right next door to the factory and look to San Antonio to take advantage of large availabilities and lower rental rates.
Leasing activity in both the Austin and San Antonio markets have been red hot over the last several quarters, with both markets experiencing record absorption in the last year. San Antonio has been seeing large distribution companies with big credit and a higher number of deals over 100,000 square feet. Overall, rental rates are increasing in both markets, especially in second-generation spaces.
Developers delivered a wave of new construction in the San Antonio market recently, and most of it is being absorbed at a rapid pace. There is a huge amount of product in the development pipeline in Austin that will be delivering in 2022 and 2023, which may have a negative effect on absorption and vacancy.
Tenants in the Markets
Austin’s industrial tenants have typically been related to the tech, R&D, household products and semiconductor industries. The onset of e-commerce and effects of COVID-19 together with the Tesla announcement have drastically changed the landscape of tenants in the market.
Currently, local brokerage firm AQUILA Commercial is tracking over 15 million square feet of tenant demand in the market, many related to the automotive and e-commerce industries. Other growing sectors include the food and beverage industry as well as life sciences. The elephant in the room, Amazon, continues to gobble up large blocks of space in the market and is now purchasing land to position itself for future developments.
San Antonio’s industrial tenants are typically a mix of large distribution 3PL, automotive, oil field services, food production and manufacturing companies.
Regional grocer H-E-B has its headquarters in San Antonio, owning and leasing an impressive amount of square footage in the Northeast submarket. Toyota is also a large player in the market on the south side of town, with many of its vendors on or near its campus. Retail outfits like TJX Cos. also have large footprints in the market. Amazon has leased a significant amount of space too.
Before COVID-19, warehouses in San Antonio that had delivered in shell condition sat empty for months. Once
COVID-19 hit, the demand for these spaces skyrocketed and big blocks of space were absorbed almost instantly. Today in San Antonio there are record low vacancy numbers, but not a ton of land available for future development.
Austin has seen an increase in new developments planned; some of this again due to Tesla’s 2020 groundbreaking of the Gigafactory. As soon as Tesla announced the Gigafactory, land speculators flocked to purchase acreage so they could position themselves for Tesla vendors coming in. As of now, there is about 15 million square feet in Austin’s pipeline, and San Antonio has about half of that.
In terms of investment sales activity, Austin has been on fire lately. Cap rates are compressing to all-time lows below 3 percent, and there is a tremendous amount of interest from institutional investors looking to make their first splash in town.
San Antonio has not been nearly as attractive historically, but that has changed over the past two years as cap rates are compressing to below 5 percent. These trends in both markets are set to continue in the coming months. Investors remain cautiously optimistic, but demand and associated absorption remain strong.
— This article originally appeared in the October 2021 issue of Texas Real Estate Business magazine.