TEXAS SNAPSHOT, NOVEMBER 2006

Austin Industrial Market

With approximately 800,000 square feet of speculative product coming down the pipe, the development cycle  in Austin’s industrial market is in high gear as industrial developers are lining up to take advantage of strong market conditions. Austin’s industrial market has delivered nearly 280,000 square feet for 2006 as several projects came on line earlier this year, which include 160,000 square feet at The Chandler Creek Business Park and 100,190 square feet at NorthTec 4, which is located a 4616 West Howard Lane.

Several large industrial developments are underway in Austin, creating an impact on the market. For example, Trammell Crow Company recently broke ground on 224,000 square feet of speculative space in the Southeast submarket. Trammell Crow and ING Clarion Partners will spend $13.4 million to construct two buildings at the Expo Business Park on Burleson Road, which is scheduled to be completed by April 2007. With Austin-Bergstrom International Airport anchoring the Southeast submarket, developers are getting ready to kick-off several projects including Hill Partner’s 378,792-square-foot Airport Commerce Park project and Endeavor Real Estate Group’s 192,000-square-foot Southpark Commerce Center Phase III.

In one of Austin’s most notable projects, Samsung Electronics is moving full-speed ahead on the construction of its second local semiconductor factory, which will be known as Austin Fab 2. The building shell of the massive project is expected to be completed in June 2007 as the new factory’s estimated to be about three times the size of the company’s existing 611,000-square-foot factory in Northeast Austin.

With construction of 224,000 square feet of bulk warehouse underway and another 570,792 square feet set to break ground by year-end, Southeast Austin is by far the most active submarket for industrial development. Local developers are drawn to the Southeast industrial submarket’s availability of land that is reasonably priced with good access to major freeways. Austin-Bergstrom International Airport also continues to be a draw for the Southeast submarket as several tenants including Ambion Inc., Bentoli AgriNutrition LP and PPD Inc., which recently contributed to the 135,523 square feet of absorption in the third quarter as the year-to-date absorption figure grew to 308,114 square feet.

Active industrial developers in Austin include Trammell Crow Company, ING Clarion Partners, Hill Partners and Endeavor Real Estate Group, which are all Austin players who know the market well and are able to respond quickly.

Although Austin continues to primarily be considered a high-tech market, most of the new industrial developments to be built within the next 6 to 12 months will have the bulk-warehouse tenant in mind since there currently isn’t much bulk warehouse/distribution space available in the market.

While Austin’s industrial market is seeing expansions of existing companies, new firms are entering the market and start-ups are looking to get in early on the market’s momentum. Specifically, there are more traditional office space users that are looking at industrial flex space as a cheaper alternative since office rents have dramatically increased within the past year. Even with an increase in number of tenants looking to flex space, there’s still an abundance of space available on the market as vacancy currently stands at 15.5 percent, totaling 2.5 million square feet.

During the third quarter, Austin’s industrial leasing market posted 330,021 square feet of positive net absorption pushing the year-to-date absorption figure to nearly 1.3 million square feet for the year. Leading the way, R&D/flex product registered 145,402 square feet of positive growth as the annual absorption grew to just more than 500,000 square feet. Also contributing to the positive growth, warehouse/distribution and standard industrial product recorded 130,859 and 53,760 square feet of black ink, respectively.

Another major lease was Eagle Global Logistics signing for 144,112 square feet of industrial space in the Harris Branch Building at 12555 Harris Branch Parkway during the third quarter of 2006.

On the  north side of town, Tharco Containers has leased 152,460 square feet from the Vista Park at 15877 Long Vista Drive. The company will start occupying the space this month. Built in 2000, the industrial building measures 152,460 square feet and includes 29 loading docks.

Also on Long Vista Drive, Farmers Insurance Group of Companies is relocating its Texas headquarters and adding a new call center. Farmers signed a lease for 152,000 square feet of space in the Long Vista building at 15700 Long Vista Drive. The insurance company will relocate from its current offices at the corner of State Highway 1325 and Interstate 35 in the first quarter 2007.

Overall asking rents increased by $0.26 to $6.80 NNN per square foot per year during the third quarter, a $1.16 increase within the past 12 months. The majority of the rise in rents occurred in the warehouse/distribution sector as asking rents increased by $0.30 to $6.06 NNN per square foot per year. Up next, standard industrial registered a $0.29 quarterly increase to $6.92 while R&D/flex rents improved by $0.26 to $7.40 NNN per square foot per year.

Austin’s overall vacancy fell by 50 basis points to 10.2 percent during the third quarter, reaching its lowest level since 2001. The R&D/flex market saw the largest vacancy drop for the quarter, falling by 60 basis points to 15.5 percent. Not to be outdone, the warehouse/distribution sector saw vacancy decline by 50 basis points to 9.5 percent during the third quarter.

The Southeast submarket witnessed the largest vacancy decline of 1.3 percentage points to 10.2 percent in the third quarter with the majority of the vacancy decline occurring in warehouse/distribution product. Following suit, the South submarket saw overall vacancy decline by 90 basis points to a low 5.4 percent.

 The Southeast and, to a lesser extent, East Austin will be the submarkets to keep an eye on with the significant number of new projects coming online. 

— Chris Gamel is vice president with Grubb & Ellis in Austin.

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