TEXAS SNAPSHOT, NOVEMBER 2010

AUSTIN INDUSTRIAL MARKET

Austin’s industrial market can be largely categorized as one with relatively weak demand and an oversupply of product. This has fueled intense competition from landlords to secure or retain existing tenants through concessions such as free rent or increased tenant improvement funding and reduced rental rates. Tenants have been taking advantage of these market dynamics and negotiating aggressively in order to lock in low rental rates. In the case of renewals, some landlords have been allowing tenants to renew a year in advance to be sure they stay at the property. Overall, Austin’s industrial market closed the third quarter with a 14.3 percent vacancy rate, up 20 basis points from the second quarter. Quarter-over-quarter, the R&D/flex product sector’s vacancy rate increased 80 basis points to 19.6 percent in the third quarter, while the warehouse/distribution property sector’s vacancy rate decreased 70 basis points to 16.8 percent during the same time frame. Looking forward, vacancy is expected to level off and even decline moving into 2011 as leasing velocity gains momentum, coupled with the lack of new industrial projects entering the pipeline.  

Transaction velocity has been slow due to the lack of financing available. During the third quarter, eight properties traded hands for an aggregate value of $14.7 million and an average price of $66.86 per square foot. For investment properties, velocity will likely remain slow for an additional 2 years, as this is when financing for these properties is projected to become readily available. Sales that do occur will likely be institutional and be purchased by cash buyers or users with access to SBA financing.

The Austin industrial market has been plagued by large corporations shutting down or downsizing.  Applied Materials recently shuttered more than one-third of its industrial campus located at 10801 Giles Road, with 600,000 square feet of space now available for sale or lease. The space reductions, coupled with relatively weak demand, have helped fuel the intense pressure to attract new tenants to the market. Many tenants are shopping the market, only to arm themselves with the leverage necessary to aggressively negotiate low renewal rates with their current landlord.

The availability of financing and light demand are the largest challenges developers in the Austin region face today. The market was overbuilt a few years ago and has yet to reach equilibrium. Therefore, any new speculative construction is likely at least a few years away.

No new industrial space has broken ground or been delivered in Austin for at least 2 quarters. However, in July, the CEO of Formula One Group announced that Austin would host F1 races from 2012 through 2021 and become the first U.S. city to stage such races since Indianapolis in 2007. The race track will need to be built, and may be located on a 900-acre site in southeast Austin along the State Highway 130 corridor near FM 182. As of now, the business community is anxiously waiting to see if the track, which would be built during 2011, will commence. If built, this could mean a spark of activity in Austin’s industrial market, through development, manufacturing, or even warehouse/distribution services. Overall, it would bode well for the community.

The Southeast submarket stands to be the most active, since it has had the most industrial product recently come available. While the North submarket remains a mature and viable submarket, the Southeast submarket’s proximity to the airport, available land, surplus of newly available product and improved infrastructure provide ample room for future growth. There was quite a bit of activity along the submarket’s Burleson Road in particular during the third quarter. Goodwill Industries of Central Texas fully leased 6505 Burleson Road, where it plans to consolidate two warehouses, offices and retail space into one location. Additionally, both U.S. Courier & Logistics and Ultra Electronics Advanced Tactical Systems Inc. leased 76,800 square feet of space at Burleson Business Park, located at 4101 Smith School Road, just off Burleson Road.

I expect that new companies will announce moves to Austin, possibly from California, due to the region’s friendly business climate, lower taxes, cheaper labor and educated workforce. In August, the National Scooter Company announced it would be relocating its global headquarters to Pflugerville, a suburb of Austin, where along with its headquarters and retail store, the company will move its manufacturing, design, engineering, distribution and shipping services to the Springbook II Business Park. Moves likes these will stir the market. Additionally, any news regarding the Formula One Group’s new track in Austin will spark interest and get people talking.

— Chris Gamel, CCIM, is vice president of the Industrial Group with Grubb & Ellis.

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