TEXAS SNAPSHOT, SEPTEMBER 2005

Austin Industrial Market

Austin’s overall commercial real estate market is steadily strengthening. However, absorption of flex and warehouse space still lags office absorption, and pales in comparison to retail demand.

According to CoStar’s Mid-Year Industrial Report, at the end of the second quarter 2005, Austin had a 15.5 percent industrial vacancy rate — a rate that has fluctuated from a low of 15.2 percent to 17.9 percent over the past 18 months. Another 12 to 18 months will pass before the industrial sector sees significant new development and benefits from the region’s economic recovery and growth.

Rates vary greatly depending on the space and submarket location. The latest statistics show a citywide mid-year average of $7.70 per square foot for flex space and $6.30 per square foot for warehouse space.

Over the past several years the majority of industrial development in Austin has been limited to smaller buildings in the 5,000- to 20,000-square-foot range. With minimal demand, development has been driven by local companies and developers taking advantage of low interest rates and the trend of real estate ownership.

New, more substantial activity is beginning to be seen in key areas of the region. Impending development is focused in three submarkets: southeast, northeast and Round Rock. The southeast remains a strategic submarket because of its proximity to the airport and its convenience to both Interstate 35 leading south to San Antonio and the new State Highway 130. The Round Rock and northeast markets will also remain strong because of proximity to I-35 and SH 130, and benefit from continuing growth in the northern Greater Austin area. Currently under construction, SH 130, a 90-mile, $1.38 billion toll road that will run from Georgetown to Interstate 10 in Seguin, is connecting several bedroom communities throughout the region. SH 130 should relieve traffic on I-35 and will become a major transportation alternative complementing, if not spurring, developments along its planned route.

Northeast Crossing is an example of a recent development created to leverage proximity to SH 130, and an opportunity for a triple Freeport tax exemption. The exemption enables businesses to avoid paying taxes on inventory that leaves the state within 175 days. Completed in 2004, Northeast Crossing currently totals 200,000 square feet with an additional 200,000 square feet proposed.

Other upcoming developments include an 80,000-square-foot warehouse building with spec suites and five industrial condos, designed to accommodate smaller users in the 5,500- to 18,000-square-foot range at the Chandler Creek development in Round Rock. Tech Ridge, representing 1 million square feet of industrial space in the far northeast market, is planning to add an additional 200,000 square feet to an existing building, and a 240,000-square-foot build-to-suit facility for a logistics company. In the southeast market, several business parks have additional buildings planned for development in the near future.

Due to zoning constraints and environmental protection, other submarkets have simply reached capacity. The southwest’s availability of flex space is very limited. No new sizable developments are feasible. As a result, concessions widely available through 2004 are increasingly difficult to secure, and rates are rising. The northeast is the next submarket steadily experiencing absorption of its industrial space. As a result, the northeast is finally seeing rental rates stabilize as users evaluate its remaining inventories of space. The squeeze is on for large users across Greater Austin. Limited options exist in the region for users that need 100,000 square feet  or more.

Despite progress in market recovery, extensive development of new industrial and flex space is not likely in the near-term. The bulk of anticipated development is going to be user-driven, especially as larger spaces are taken off the market.

Developers in Austin have traditionally sought to attract high-tech, manufacturing, and distribution users. Major tenants currently absorbing large blocks of industrial space include a number of technology companies, such as Dell, Applied Materials, Solectron and Celerity. Recent large leases include Eagle Global Logistics’ lease of 195,000 square feet at Corridor Park 9; Ferguson Enterprise’s expansion into a 145,000-square-foot warehouse space in Round Rock; Austin Foam & Plastics’ lease of 104,000 square feet at 15833 Long Vista Dr.; and MagRabbit’s new 76,000-square-foot facility at The Domain.

A new trend poised to impact the Austin market is the interest by several institutional owners in selling their assets — representing just over 700,000 square feet of space. There has also been an increase in activity in investor acquisition inquiries.

Industrial submarkets with the most activity will continue to be the southeast, northeast and Round Rock. Overall Austin continues to expand northward — the new toll road will create more opportunities with outlying communities anxious to leverage the new route for economic development. Growth in Austin continues at its historic steady pace. The real news, however, will be a year and half down the road when the industrial market improves as all user-levels begin to feel the squeeze.

— Lee Ellison, Associate Vice President; Daniel Farrar, Associate Vice President; and Dan Meyer, Associate, of Commercial Texas’ R & D, Industrial and Land Services Group.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.