COVER STORY, JANUARY 2012

Austin Industrial Market

Austin’s industrial market tends to be a bell-weather for the local economy, as the market is more focused on local consumption rather than logistics for the transport of goods to other markets. As a result, employment and the overall health of the local economy are reflected in the demand and supply of warehouse, flex and general industrial product. Austin’s go-go economy of 2005 until 2008 saw a rapid absorption of product, as well as more than 2 million square feet of new developments that hit the market during that period. As the economy turned south in 2008, employment numbers and consumer confidence followed. The result was that new product delivered in 2008 and early 2009 took longer to lease. There were also casualties over this time period as projects such as Centerpoint at Colorado Crossing and Plaza 35 went into foreclosure.

We are now seeing a return to normalcy, as absorption improved markedly with 477,518 square feet of industrial product absorbed in the third quarter. This is broken down into 183,577 square feet of warehouse/distribution product, 150,121 square feet of general industrial product and 143,820 square feet of R&D/flex space. This market sector has witnessed significant fluctuations in absorption during the last few years with improved demand in 2011 and several consecutive quarters of positive absorption. This helped put an end to a spiraling vacancy rate that hit its peak in mid-2010 and is now moving back to a more stable territory. A healthy level of recent tenant activity has given the local market a boost, causing occupancy to rise and provided a collective sigh of relief amongst landlords. Austin’s economy is driven by the energy, government, healthcare and high-tech sectors, which are fueling job growth for the Central Texas region. Not only will companies such as Samsung, which invested billions to expand its chip manufacturing plant, see Austin as a logical place to grow their business, but others will also seek to follow the infrastructure and support that can be found here.

Although it remains a tenant’s market, the increased absorption is a welcome respite from the last few years. With roughly 10 million square feet sitting vacant, any new industrial development will be relegated to build-to-suit requirements. Historically, once vacancy approaches 10 percent, developers begin salivating to add new industrial development to the market. Overall vacancy has dipped slightly to 13.1 percent and asking rental rates have remained relatively flat, an indicator that the industrial market remains very much a tenant’s market with no changes in the foreseeable future. However, concessions are beginning to tighten some.

Development activity has been limited to build-to-suit projects, constrained by demand and financing limitations. A 72,000-square-foot cloud computing data center is under construction at Met Center 6 for CyrusOne LLC, and a 60,000-square-foot facility across from Met Center is under construction for VA Financial Services. Bison Global Logistics Inc., an air freight forwarder, is building a 51,000-square-foot facility to occupy in Pflugerville. After much wrangling with The City of Buda, U.S. Food Services is constructing its 290,000-square-foot facility at the intersection of Turnersville Road and County Road 118. The latter two projects were slated for delivery in fourth quarter 2011.  

Investment activity has been somewhat limited to distressed assets as evidenced by the aforementioned REO sales. However, Prologis did sell some of the company’s industrial portfolio in Austin, a function of the merger with AMB and the resulting need for liquidity for the new entity.

In conclusion, Austin saw its industrial market start its return to normal in 2011 after bottoming out at the end of 2010, and is ticking up with encouraging signs of growth. Growth for the market will again be a function of growth in the local market and its primary sectors driving demand.

— Chris Gamel, CCIM, vice president, Industrial Group with Grubb & Ellis Co.’s Austin office

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