By Bob Mohr, chairman, Mohr Capital
When people talk about Austin, they call it one of the best places in the country to live. They talk about the live music scene, the die-hard fans who flock to The University of Texas football games and the hills sprouting bluebonnets.
They talk about Austin attracting California residents and companies during the pandemic, bolstering the city’s tech base and positioning it as a significant Silicon Valley rival. They talk about office demand and the increasing costs of single-family housing.
Bob Mohr, Mohr Capital
Few people mention Austin’s industrial market, but they really should, because there’s a heck of lot to talk about. At 55 million square feet, Austin’s industrial market is still fairly small, especially compared with the Lone Star State’s big three metros of Dallas-Fort Worth (DFW), Houston and San Antonio.
Despite its size, the Austin industrial market is experiencing significant demand from various companies, particularly e-commerce and service-related tenants. And even though Austin tends to be a bit of a bubble market, money is flowing in the form of new construction and investor interest.
Absorption Pushes Occupancy
Historically, Austin has not been a big box warehouse market. Most industrial inventory is smaller, developed to cater to local and regional players and often referred to as tech or flex space. But over the past several years, development of bulk warehouse industrial properties, which have larger footprints and require higher clear heights and more parking for trucks, has increased dramatically.
Newmark reports that in the Austin area, 12.9 million square feet of industrial product was under construction at the end of the second quarter — nearly 10 million more square feet than was in the development pipeline at that time last year. The market has roughly 12 million square feet of requirements in the market from users searching for space.
Similarly, second-quarter industrial absorption remained strong at 1.5 million square feet, according to Newmark’s data. The figure marks the ninth-consecutive quarter of positive absorption, while leasing activity had an all-time market high of more than 3 million square feet.
The average asking rental rate for available industrial space stabilized during the second quarter to $11.38 per square foot on a triple-net basis. Rates continually increased across all industrial property types, and of the major submarkets, five recorded asking rent in excess of $13 per square foot.
Tesla Attracts Other Users
Last July, Tesla announced plans to build a new factory in East Austin. Situated on 2,100 acres, the Gigafactory will consist of 4 to 5 million square feet of industrial space and has an estimated price tag of $1.1 billion. It will be one of the world’s largest and most advanced automotive plants, bringing the region an estimated 5,000 jobs.
The Gigafactory, which was the biggest industrial deal in Texas in 2020, is transforming Austin’s industrial sector. Some estimates indicate that as many as 50 or more companies could potentially follow Tesla to Austin to act as suppliers and providers of supporting services. These suppliers are looking for large blocks of industrial space — larger than anything seen in the Austin market historically.
Austin’s industrial vacancy rates have compressed to historic lows, a situation expected to continue until a large pipeline of new product is delivered in 2022 and 2023.
Amazon Follows Rooftops
Austin’s expanding population, coupled with household growth, has compelled Amazon to increase its footprint. The e-commerce giant is currently building a 3.8 million-square-foot distribution center in Pflugerville, a northern suburb.
Additionally, Amazon currently occupies a 160,000-square-foot last-mile distribution center. Located in Austin’s Southeast industrial submarket, MetCenter Building III is part of the 550-acre MetCenter mixed-use business park adjacent to Austin-Bergstrom International Airport.
Mohr Capital acquired the building in 2019 as part of a 404,800-square-foot, $100 million portfolio acquisition from Zydeco Development. We recently sold the property, as well as an adjoining parking lot, to Four Springs Capital Trust in an off-market transaction.
The disposition certainly demonstrated that Austin is in the middle of an industrial boom. But as developers, we must wonder whether the current market is worth it when it comes to speculative and build-to-suit bulk industrial facilities.
Potholes in Road to Expansion
Unless you’re Amazon or Tesla, it’s not easy to develop bulk industrial in the Austin area under normal circumstances, and the pandemic has made it even more challenging. The topography everyone loves so much because of the rolling hills makes industrial development difficult. Zoning adds another layer of complexity.
When it comes right down to it, Austin is a progressive city that is cautious about heavy industrial development. As a result, many developers who faced roadblocks before are having a tougher time now due to the city’s limited resources stemming from the pandemic.
Well-located industrial sites are moving quickly at very aggressive prices. Previously, raw land sold for $4 to $5 per square foot; now it’s selling for as much as $10 per square foot for infill acreage.
Austin’s infrastructure also leaves something to be desired. Anyone who’s ever driven on Interstate 35 knows how difficult it is to get around the city and surrounding suburbs.
Labor could present another problem, especially for companies needing to hire warehouse workers. Unemployment is very low, meaning there’s a lack of available talent. Eventually, it may become too expensive for companies to operate in Austin, given how labor and real estate costs are moving.
As developers, when it comes to the state capital, we must consider how much we can scale our industrial spaces. Due to various factors, the market continues to change rapidly, so facilities need to be developed as quickly as
possible.
Developing industrial product in Austin is doable and profitable if done quickly. But before jumping in, developers have several factors to consider, including if a piece of land is zoned for industrial and what environmental issues might cause entitlement or construction problems.
Our advice is to weigh whether or not the effort is worth the time and energy, and if so, focus on high-growth areas. And then get your facility built quickly — preferably within 18 months — before the pendulum swings back to pre-pandemic demand.
— This article originally appeared in the July 2021 issue of Texas Real Estate Business magazine.