Austin’s industrial market continued to strengthen in 1Q 2021. Despite Austin’s smaller size compared to larger primary or gateway markets, its ongoing growth has cemented the city as a significant industrial player nationwide.

Tesla’s new Gigafactory, announced in July of last year, continues to attract Tesla suppliers looking for large blocks of industrial space. The size of these requirements has been larger than anything seen in the Austin market historically. This increased demand has caused a number of developers to stake claims in the Austin area.

Read Next: How East Austin Will Change in the Next Decade (Tesla, Traffic and more)

Looking beyond Tesla, in 1Q 2021, Austin saw an influx of tenants in the e-commerce and manufacturing sectors relocate from other parts of the U.S. This activity has caused vacancy rates to compress to historic lows, a phenomenon that is expected to continue until a large pipeline of new development is delivered in late 2022 and into 2023.

Following last quarter’s trend, absorption remains strong in the industrial market. Demand for space is led by major players like FedEx, Tesla, and Amazon, as well as major retailers that have committed to an increased focus on e-commerce.

The market has also seen a myriad of distributors and manufacturers looking for industrial space, many of which are related to Tesla or Samsung, the latter having heavy infrastructure requirements. With a dynamic economy and record population growth, AQUILA expects the Austin industrial market to continue its unprecedented surge into 2Q 2021 and beyond.

In 1Q 2021, there was 1,065,729 sf of positive net absorption region-wide for industrial space. This is higher than the impressive 638,339 sf of positive absorption witnessed in 4Q 2020. This figure is a strong indication of the market’s health and is a result of several large tenants moving to town and local tenants expanding into new construction delivered in 2020.

 

Industrial Absorption Still Strong, Flex Absorption Continuing to Rebound

In 1Q 2021, there was 1,065,729 sf of positive net absorption region-wide for industrial space. This is higher than the impressive 638,339 sf of positive absorption witnessed in 4Q 2020. This figure is a strong indication of the market’s health and is a result of several large tenants moving to town and local tenants expanding into new construction delivered in 2020.

Flex absorption, which was negative for most of 2020, continued the rebound that began in 4Q 2020. The flex market saw 43,864 sf of positive absorption in 1Q 2021, following last quarter’s absorption of 203,944 sf. Two continuous quarters of positive absorption have led to a drop in the flex market’s vacancy rate.

Several notable leases were signed in 1Q 2021, including:

  • Move Solutions’ 107-541-sf lease at Park 183, Phase III Building 3
  • Daryl Flood’s lease renewal of 104,146 sf at 15833 Long Vista
  • Wayne Fuel (Dover)’s 84,000-sf lease at 2120 Grand Avenue Parkway (the company took over a space previously occupied by medical supplier Owens & Minor)

 

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Vacancy Drops and Rental Rates Level Off

This quarter, Austin experienced a decrease in industrial vacancy with rental rates remaining relatively constant. Flex spaces, by contrast, saw little change in vacancy while rents jumped by
$0.42 per square foot regionwide.

The regional vacancy rate for flex space decreased by 30 basis points, from 6.5% in 4Q 2020 to 6.2% in 1Q 2021. Industrial vacancy rates experienced an even more significant drop, going from 6.6% in 4Q 2020 to 4.7% in 1Q 2021.

The largest drop in industrial vacancy occurred in the Southeast industrial submarket due in part to the 107,541-sf lease by Move Solutions, and three other leases of approximately 50,000 sf by Eleiko, Siete, Family Foods and Alterman Electric. The greatest increase in industrial vacancy occurred in the Northeast submarket, rising from 214,057 sf in 4Q 2020 to 368,059 sf this quarter, due in large part to the delivery of TechRidge two.3 and two.4.

Rental rates showed mixed trends last quarter. Regional industrial rents dropped from $8.54 per square foot in 4Q 2020 to $8.50 per square foot in 1Q 2021, while flex rents increased from $14.84 per square foot in 4Q 2020 to $15.26 per square foot in 1Q 2021. This decrease in industrial rental rates is due to the delivery of new construction and the lower rents associated with new buildings.

Read Next: How Much Does It Cost to Lease Industrial Space in Austin, Texas? (Rental Rates)

 

Unemployment Rises, Leisure and Hospitality Sector Lags and Growing

Unemployment increased in 1Q 2021 with job losses in the leisure and hospitality sector driving most of the change. But, the pandemic’s effect on employment has appeared to soften. In February, the Texas Workforce Commission (TWC) reported 6,481 new unemployment claims, 800 fewer than the month prior.

The Bureau of Labor Statistics reports that the preliminary unemployment rate in the Austin area was 5.6% in February 2021. This is a 70 basis point increase from 4Q 2020, but it still remains below the 6.2% unemployment rate at the end of 3Q 2020.

Unemployment Rate Comparison

austin industrial market 1q 2021

Prior to 2021, the Austin MSA experienced a steady decline in the unemployment rate after it peaked at 11.8% in April 2020 during the initial fallout from the COVID-19 pandemic. Although 1Q 2021 saw a slight bump in unemployment, Austin continues to outperform both the state of Texas and the U.S., which recorded unemployment rates of 6.9% and 6.2% respectively, for February 2021. Within Texas, Austin’s 1Q 2021 unemployment rate was also lower than most metropolitan areas including Dallas, Houston and San Antonio.

Read More: AQUILA COVID-19 Austin Real Estate Resource Center

 

Closing

Despite the hardships that Central Texas has faced over the past year, one thing is certain: people still want to move to Austin. According to the Austin Chamber of Commerce, the Austin region grows at an average of 169 people per day, 128 of which can be attributed to net migration.

Combined with the rapid growth of e-commerce sales (30% increase from 2019 to 2020), it’s no surprise that Austin’s industrial market has kept up its pattern of growth from last quarter. Austin continues to experience high absorption and an impressive number of project announcements, foreshadowing an industrial market that will perform well for the remainder of 2021.

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Leigh Ellis | Industrial Commercial Real Estate in Austin, Texas | AQUILA Commercial

Leigh Ellis, SIOR

Leigh is AQUILA’s resident industrial specialist. There’s not an industrial or flex space in the market he doesn’t know. Leigh’s experience is diverse and deep, spanning leasing, tenant representation, acquisitions and dispositions.

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