18 straight quarters of positive absorption for Austin Industrial market

EXECUTIVE SUMMARY

Q4 in Review

By the end of Q4 2023, the overall vacancy rate in Austin’s industrial market rose 550 basis points year-over-year, from 4.4% to 9.9%. This is mainly due to a surge in available space resulting from robust construction and speculative deliveries. Construction is at 18.7 million sq. ft.—a record-high for Austin’s industrial sector—up 38% from 13.6 million sq. ft. in Q4 2022. Samsung’s Semiconductor—a 2.8 million sq. ft. warehouse—started in March and marked the largest construction start of 2023. Deliveries are at 3.9 million sq. ft. Supply continues to outpace demand—year-to-date deliveries tallied 12.2 million sq. ft., and year-to-date net absorption amounted to 4.4 million sq. ft. However, notable move-ins—SpaceX Project Echo (521,521 sq. ft.) and RK Logistics Group (200,000 sq. ft.)—contributed to net absorption nearly doubling year-over-year to 1.3 million sq. ft. Leasing activity is at 2.3 million sq. ft.—bringing year-to-date leasing activity to 10.8 million sq. ft. Lastly, the average monthly rental rate (NNN) reached $1.18 per sq. ft.—a record-high for the metro’s industrial sector.

Austin Economic Update

According to the latest release of Austin’s Economic Indicators, Austin’s unemployment rate remained flat at 3.6% from September to October 2023. The metro’s jobless rate lagged the state and the national rates at 4.1% and 3.9%, respectively. Austin’s employment is at 1.3 million as of October 2023—increasing 0.1% in October, much less than the 5.7% gain in September. The largest gains by sector include: construction and mining (+1,316 jobs, 20.4%), health and education (+1,062 jobs, 8.6%), and professional and business services (+1,880 jobs, 8.1%). The largest declines by sector included: leisure and hospitality (-1,877 jobs, -14.1%), and manufacturing (-845 jobs, -13%).

MARKET OVERVIEW

Net Absorption Nearly Doubles Year-Over-Year

Net absorption—move-ins minus move-outs—is at 1.3 million sq. ft., nearly doubling year-over-year from 782,096 sq. ft., continuing its positive streak for 18 straight quarters. Year-to-date, net absorption is at 4.4 million sq. ft. Warehouse/Distribution space and Flex space recorded positive absorption of 1.4 million sq. ft. and 20,550 sq. ft., respectively. Manufacturing space logged negative absorption of -91,545 sq. ft. SpaceX Project Echo moved into a 521,521-sq.-ft. warehouse at 815 FM 209 in December—the largest contributor to positive net absorption in 2023. In addition, RK Logistics Group occupied a 200,000-sq.-ft. distribution center at 400 Vista Ridge Drive in March.

Leasing Activity Remains Robust

Quarterly leasing velocity—comprised of new leases and renewals—stood at 2.3 million sq. ft., increasing by 24,096 sq. ft. year-over-year. Year-to-date, leasing activity is at 10.8 million sq. ft., compared to the prior year’s 11.5 million sq. ft. Industrial leasing activity remains robust—averaging 2.7 million sq. ft. over the last three years—as recent expansions among manufacturing firms helped lift total leased space in 2023 above pre-pandemic averages. By year-end, 136 deals were signed, averaging 52,467 sq. ft., with notable exceptions from Tesla (1.0 million sq. ft.) in July and ZT Systems (435,714 sq. ft.) in October. Located along Kyle’s southern gateway, Tesla’s 3-warehouse, 1.0 million-sq.-ft. deal stood as the largest contributor to leasing activity in 2023.

Vacancy Rate Increases to 9.9%

The overall vacancy rate in the Austin industrial market is at 9.9%. Quarter-over-quarter, the vacancy rate increased 170 basis points from 8.2%. Year-over-year, the vacancy rate increased 550 basis points from 4.4%. Flex, Manufacturing, and Warehouse/Distribution space have vacancy rates of 7.4%, 2.5%, and 12.5%, respectively. The upward trajectory is mainly due to the surge of available space resulting from robust construction and upcoming speculative deliveries, which will continue to increase vacancies for the next year—a 12-13% overall vacancy rate is projected by the end of 2024.

Record-High Construction Pipeline Approaches 19 Million Sq. Ft.

Austin’s industrial pipeline remains in a period of supply expansion due to population growth, the e-commerce boom, and large occupiers entering the market. By the end of the fourth quarter, construction reached 18.7 million sq. ft.—a record-high for Austin’s industrial market. Quarter-over-quarter, construction increased 2% from 18.4 million sq. ft. Year-over-year, construction increased 38% from 13.6 million sq. ft. Over the prior three years, construction averaged 9.4 million sq. ft. annually. The Georgetown/Round Rock submarket led construction with 6.9 million sq. ft. underway (37%), followed by the Northeast submarket with 6.1 million sq. ft. underway (33%). Samsung’s Semiconductor—a 2.8 million sq. ft. warehouse—started in March and located at 900 County Road 401 (Georgetown/Round Rock submarket) was the largest construction start in 2023. Deliveries are at 3.9 million sq. ft., surging year-over-year from 13.6 million sq. ft. Year-to-date, deliveries are at 12.2 million sq. ft.

Investment Sales Trends

CoStar Capital Market Analytics reports the cumulative 12-month sales volume for Q4 2023 at $339 million, up 94% from $175 million in Q4 2022. By year-end, 215 deals were completed in the Austin industrial market with an average transaction price of $154 and an average cap rate of 7.3%. Notable transactions in 2023 include Goldman Sachs’s acquiring a 623,217-sq.-ft. industrial portfolio—consisting of 5 properties—from TPG for $126 million in September, and Blackstone acquiring a 3.7 million-sq.-ft. industrial portfolio—consisting of 16 properties—from IDI Logistics $392 million in June. Both portfolios were 100% leased at the time of sale.

Record-High Asking Rent

The average monthly rental rate (NNN) for Austin’s industrial market increased to $1.18 per sq. ft.—a record-high for the metro’s industrial sector—up 9% from the previous year’s $1.07 per sq. ft. The average monthly rate per square foot for Flex space stood at $1.43 per sq. ft., while the rates for Manufacturing space and Warehouse/Distribution space were at $1.16 per sq. ft. and $1.11 per sq. ft., respectively. The Northwest submarket commands the highest overall monthly average rate at $1.61 per sq. ft., followed by the North Central submarket at $1.44 per sq. ft.

Alex Babcock
Senior Research Analyst
[email protected]
tel 713 275 9618