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On account of the diverse local economy and a tech employment base in high demand by global firms, the Austin industrial market has realized a recovery that should sustain continued rent growth with a healthier inventory delivery schedule over the next 24 to 36 months. Austin has added nearly 105,000 jobs during the economic recovery through May 2013, bringing total employment 9 percent above its previous peak in late 2008. The unemployment rate, at only 5.4 percent in May, is more than 200 basis points below the national average of 7.6 percent. The broad tech sector expansion, including new facilities underway for Apple and Samsung, and the strong housing market are driving robust growth in construction employment, while all three areas represent key supports for industrial tenant demand.
On the heels of record net absorption in 2012 of 2.1 million square feet — an annual total not experienced in more than 15 years — industrial vacancy in Austin has fallen to 12.5 percent, a low not seen since the market’s peak in 2007. An important differentiating factor for the market today versus the 2007/2008 cycle is the limited amount of construction. When vacancy rates fell to 11 to 12 percent at the previous peak, Austin’s industrial market was in the process of delivering nearly 3 million square feet of new speculative construction. Today, there is only one speculative project underway: a three-building 475,000-square-foot development in Austin’s North submarket.
Contrary to typical Austin lease transactions, which range in size from 25,000 to 50,000 square feet, there has been a tremendous amount of large tenant demand over the last 18 months. The trend began in first quarter 2012 with US Farathane, headquartered outside of Detroit, leasing 242,000 square feet for a manufacturing division in Northeast Austin.
American Tire Distributors added another Texas distribution hub in the second quarter of 2012 totaling 127,000 square feet. The project is also located in Austin’s Northeast submarket. After a national site selection process, HID Global, headquartered in Irvine, Calif., decided on Austin for a consolidation of its U.S. manufacturing operations. The facility is currently under construction and will deliver 220,000 square feet in November of this year in the Northeast submarket. Austin is currently tracking 1.3 million square feet of active large requirements at an average size of 216,000 square feet.
There is very limited supply of large blocks of space that can accommodate this active tenant demand, so CBRE is projecting more build-to-suits going into 2014. Austin developers with a site development permit in hand will get the first look, while sites with a long development time horizon will fall out of consideration. The surrounding communities of Cedar Park, Round Rock, Pflugerville and Buda will likely benefit from their ability to fast track the construction planning approval process in addition to their aggressive corporate incentive programs.
Landlords began raising rents in first quarter 2013, but rents have yet to reach levels high enough to support new construction, and they likely have another 10 to 15 percent to go. Lenders are requiring significant pre-leasing, larger equity positions or personal guarantees before they will consider construction financing. Continued absorption and tempered new construction supply should result in higher rents in a more sustainable cycle, versus Austin’s historical boom-and-bust history.
Leasing activity remains strong from organic expansions and relocations within Austin’s existing industrial base, in addition to the continued influx of companies looking to expand manufacturing or back office support services in the Capital City. These fundamentals have aligned to create a market that should see continued rental growth with a healthy balance between large corporate build-to-suits and limited new speculative construction starts.
— Mark Emerick, senior vice president; John Barksdale, vice president; and Sara Rutledge, director of research and analysis, CBRE.