Austin’s Industrial Market shifts to neutral conditions as new construction continues to outpace demand

EXECUTIVE SUMMARY

Q2 in Review

By the end of Q2 2024, the overall vacancy rate in Austin’s industrial market increased 130 basis points over the past quarter from 9.1% to 10.4%. While demand for industrial space remains healthy (especially Warehouse/Distribution space), construction deliveries have outpaced recent absorption levels, and the total vacancy rate has been creeping up as a result. This has caused a shift in the market from overall landlord favorable conditions to more neutral conditions. Asking rates as a result dipped slightly for the past quarter (2.4%) but are still up 10% over the past year.

Austin Economic Update

According to the latest release of Austin’s Economic Indicators, Austin’s unemployment rate rose to 3.5%, remaining below the state’s and the nation’s rate of 3.9%. In February, the local labor force increased an annualized 8.8%, while the state’s increased 2.1% and the nation’s fell 0.1%. Austin employment increased 9.5% in February after decreasing 1.0% in January. Sectors with the most growth were professional and business services (4,811 jobs), government (3,119 jobs), and leisure and hospitality (1,382 jobs). Sectors that saw a decline included trade, transportation and utilities (-952 jobs) and manufacturing (-112 jobs). Year to date, Austin has seen 4.1% employment growth, below the state’s 4.3% but above the nation’s 2.1%.

MARKET OVERVIEW

Net Absorption Remains Strong, Down for the Quarter but Above Last Year

Net absorption—move-ins minus move-outs—is at 1.3 million sq. ft., this down from the 3.1 million sq. ft. last quarter but above the 856,751 sq. ft. in Q2 2023. Flex properties logged 81,376 sq. ft. of positive net absorption for the quarter, while Manufacturing and Warehouse/Distribution recorded 475,218 sq. ft. and 3,984,601 sq. ft., respectively. Notable recent move-ins include ProLift Rigging taking 229,312 sq. ft. at Whisper Logistics 35, FMT taking 187,558 sq. ft. at Gateway 35, and US Farathane taking 146,948 sq. ft. at 600 FM 972 in Georgetown.

Leasing Activity Remains Robust

Quarterly leasing velocity—comprised of new leases and renewals—stood at 2.3 million sq. ft., up from 2 million last quarter, but down the 3 million sq. ft. last year. Recent leasing activity includes Four Hands leasing 570,489 sq. ft. at 6106 Ross Rd and Control Panels USA signing a lease for 145,450 sq. ft. at Crosspoint Building 2.

Construction Pipeline Moderates to 16.8 Million Sq. Ft

Austin’s industrial pipeline remains higher than the historic norm but decreased from a record high of 18.6 million in the first quarter of 2023 to 16.8 million sq. ft. in Q2 2024. Most of the construction pipeline is concentrated in warehouse/distribution properties (87%), while Flex and Manufacturing properties make up 3% and 10%, respectively. On a submarket level, the Northeast and Georgetown/Round Rock submarkets make up the lion’s share of the construction pipeline with 7.2 million sq. ft. and 5.8 million sq. ft. underway, respectively. The Northeast submarket still has a very tight vacancy rate (5%), but Georgetown/Round Rock is at 18.8%, the highest of the industrial submarkets.

Vacancy Rate Increases To 10.4%

The overall vacancy rate in the Austin industrial market is at 10.4%. Quarter over quarter, the vacancy rate increased 130 basis points from 9.1%. Flex, Manufacturing, and Warehouse/Distribution space have vacancy rates of 8.4%, 2.6%, and 12.4%, respectively. There’s still strong demand for industrial space, particularly warehouses and distribution centers. However, new construction is outpacing how quickly companies are filling that space, causing vacancy rates to rise. For most of the market, outside of the Georgetown/Round Rock and Southwest submarkets, still have total vacancy rates in the single digits.

Investment Sales Trends

CoStar Capital Market Analytics reports the cumulative 12-month sales volume for Q2 2024 at $374 million. Over the past year, 107 properties were sold with an average transaction price of $233 per sq. ft. and an average cap rate of 7.5%. Notable transactions in 2024 include EQT Exeter purchasing the GAF Energy Solar Shingle Plant at 110 SE Inner Loop; the 449,642-sq. ft. property was built in 2023 and went for $135 per sq. ft. Air Texo purchased building 7 (a 213,832-sq. ft. manufacturing property) at the Innovation Business Park, which will be occupied by Seoyon E-hwa Manufacturing once tenant improvements are completed. Also, EQT Exeter also purchased the Lockhart 130 Industrial Park building 1, a 167,794-sq. ft. distribution facility bult in 2023. FBS Appliance fully leases the entire property.

Overall Asking Rates Dip for the Quarter, but Still Up 10% Over the Past Year

The average monthly rental rate (NNN) for Austin’s industrial market is currently $1.24 per sq. ft.—this a slight decrease from record highs last quarter, but still a 10% increase from one year ago. The average monthly rate per square foot for Flex space stood at $1.47 per sq. ft., while the rates for Manufacturing space and Warehouse/Distribution space were at $0.94 per sq. ft. and $1.13 per sq. ft., respectively. The Northwest submarket commands the highest overall monthly average rate at $1.85 per sq. ft., followed by the North Central submarket at $1.42 per sq. ft.

Steve Triolet
SVP of Research and Market Forecasting
tel 214 223 4008
[email protected]