Despite the ongoing COVID-19 pandemic and its associated adverse effects, the industrial market in Austin has flourished with industrial vacancy rates decreasing, leasing and sales activity increasing, and developer prospecting in full-force.
Much of the activity seen market-wide can be attributed to the staggering increase in e-commerce related activities, as evidenced by several recent transactions involving Amazon.
In addition to e-commerce related growth, Austin has seen an uptick in activity from distribution, manufacturing, technology, household products, and food and beverage companies alike. As large blocks of available space are rapidly absorbed, developers are increasingly eyeing prime land sites for future industrial speculative developments. This is especially true since Tesla announced in late July that they will build their Cybertruck Gigafactory in Austin on 2,100 acres northeast of the airport. The effects of this announcement will likely impact growth along the SH-130 corridor and will be addressed further in AQUILA’s 3Q 2020 Austin Industrial State of the Market.
Other markets that have recently seen significant growth are suburban markets such as Hays County (Kyle and Buda) and Northern markets like Round Rock and Pflugerville that offer direct access to IH- 35, SH-45 and SH -130.
Bulk Absorption Steady, Flex Absorption Down
In 2Q 2020, there was approximately 145,892 sf of positive absorption region-wide for industrial space, while flex absorption dropped to negative 226,298 sf.
The cause for the negative absorption in the flex market was mainly due to several large subleases in the Northeast and Southeast submarkets. Industrial activity remains steady, but the demand for higher-finish flex spaces has decreased due to COVID-19’s effect on workplace trends. Because flex spaces have a heavier office component, the demand for those spaces has been less than that of bulk industrial. Moreover, many flex uses are not considered essential while most distribution and many manufacturing uses are, hence the disparity in utility of the space and activity.
A few large transactions that fueled the industrial growth include:
- Amazon’s new lease of a three-building 442,019-sf new development at Chisholm Trail Trade Center in Round Rock
- Three-Way Logistics’ 130,438-sf new lease at Crystal Park Building B in Round Rock
- Flextronics’ 117,000-sf renewal at 9500 Metric Boulevard in North Austin
- Flextronics’ 144,000-sf renewal at Springbrook Corporate Center 7 in Pflugerville
Please note that the Amazon lease at Chisholm Trail Trade Center is not included in our absorption calculation because our methodology only includes existing buildings.
Industrial Vacancy Decreases Yet Rents Taper
While industrial leasing activity remains steady, rental rates in the industrial sector decreased from $9.01 in 1Q 2020 to $8.48 in 2Q 2020. The increase in e-commerce activity led to the execution of several large distribution leases, which typically transact at lower rates. These large distribution leases contributed to the decrease in rental rates over the past quarter. Despite activity being strong, the COVID-19 pandemic has also caused some landlords to become more aggressive on rents or incentives in order to attract new tenants. These factors have caused rates to dip in the short term, but AQUILA expects rates to rebound in 3Q 2020 and beyond.
Vacancy rates in the industrial sector decreased slightly from 9.2% in 1Q 2020 to 8.9% in 2Q 2020, which can be mostly attributed to leases in the Far Northeast and Round Rock submarkets. The industrial vacancy in Round Rock decreased from 15.8% in 1Q 2020 to 11.4% in 2Q 2020, mainly a result of the large transactions at Stoltz’s Crystal Park and EastGroup’s Settlers Crossing projects.
Meanwhile, flex rates increased for the fifth straight quarter, up from $13.72 in 1Q 2020 to $13.97 in 2Q 2020. However, due to several flex sublease spaces becoming available in 2Q 2020, vacancy rates in this product type increased 150 basis points since 1Q 2020. Despite the increase in flex vacancy, landlords are continuing to push rental rates in smaller flex spaces as leasing velocity remains strong.
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Unemployment Skyrockets Due To COVID-19, Manufacturing Rebounds
According to the Bureau of Labor Statistics, the Austin-area unemployment rate reached 7.5% in June 2020, up from 2.8% in June 2019. This is a staggering increase and a direct result of joblessness related to the adverse effects of COVID-19. This number is down from the start of the second quarter. In April 2020, Austin-area unemployment reached an unprecedented level of 12.2%.
When comparing June 2020 local metrics on a state and national level, Austin has fared better with statewide and national unemployment rates registering at 8.6% and 11.1%, respectively. Austin’s strong workforce dynamics and resilient economy will be key to future employment growth in the region.
|Unemployment Rate 2019 to 2020|
|Location||June 2019||June 2020|
|Austin-Round Rock MSA||2.8%||7.5%|
Source: Bureau of Labor Statistics
Texas manufacturing activity rebounded strongly in June 2020 after hitting a historic low in April 2020. This can be attributed to the state’s reopening of “nonessential” businesses in May 2020, and has been evident in the increased number of large manufacturing requirements in the Austin region. Most of these manufacturers are tied to the technology and research and development sectors; however, we anticipate an influx of Tesla’s vendors and suppliers to the Austin market now that the Gigafactory has been announced.
The Austin industrial market continued to perform well with healthy leasing and development activity in 2Q 2020. The large number of new requirements in the market, the increased population in the region and the interest from large companies looking to relocate all point to a positive outlook for the near future.
Look for the industrial market to strengthen in the region as companies take advantage of improvements in the global supply chain and refined warehouse automation further enables companies to grow their industrial space needs. E-commerce related groups, manufacturers, and food and beverage companies will be the catalyst for the future growth of the Austin industrial market.