Austin’s industrial market continued its red-hot pace in the second quarter of 2021, with unemployment rates continuing to decrease, vacancy rates contracting and region-wide absorption remaining well in the positive. Tenant and transaction activity in the market has been very robust through the first half of 2021, and AQUILA expects that trend to continue through the year’s end.
In this quarter’s write-up, AQUILA is highlighting the major trends in the Austin industrial market today, which include unprecedented market conditions, COVID-19’s ongoing supply chain impacts, Tesla vendors coming to Austin, and larger and more numerous industrial tenants in the market. Moreover, development activity has been at an all-time high as speculators continue to flock to Austin to take advantage of the excellent market conditions.
Unprecedented Market Conditions
Austin’s industrial market has been remarkably strong over the past three quarters, and that storyline continued through 2Q 2021 as the market continued its upward trend after the initial COVID-19 shock experienced in 2Q 2020. From a historical perspective, the industrial market in Austin is performing far better than it has in recent years.
This quarter saw 1.1 million sf of positive net absorption region-wide, putting the YTD total at roughly 2 million sf. Comparing this to the pre-pandemic years of 2018 when total net annual absorption was just over 1 million sf or 2019 when net absorption totaled only 340,000 sf, one can see why current market trends are so notable. Total net absorption in 2020 was 2.7 million sf, and it appears that the Austin market is certainly on track to challenge or surpass last year’s success. A large portion of the absorption observed in 2Q 2021 can be attributed to Amazon’s large leases signed at Springbrook Corporate Center and MetCenter II, Building 3, along with Northpoint filling up their project at Plum Creek in Hays County by leasing space to Plastikon and Outer Aisle Gourmet.
Along with this positive net absorption, vacancy rates have been consistently declining. Region-wide industrial vacancy hit 3.1% in 2Q 2021, the lowest vacancy rate since 2016. Vacancy hovered around 9% in late 2019, so it’s encouraging to see how much the industrial landscape has changed over the past few quarters. Also of note is that this decrease in vacancy has occurred in a market that has added nearly 3 million sf of new construction since 4Q 2019, which is a great sign that tenant demand continues to be strong.
Vacancy Rate Vs. Market Size
As for new construction, the Austin market is also performing well on that front. Historically, Austin hasn’t been a “pre-lease market” for industrial space, meaning deals typically don’t get signed until a building is delivered in shell condition. However, that is starting to change with several tenants signing large pre-leases for space in the early stages of development. This is attributed to e-commerce and manufacturing-related companies canvassing the market for large chunks of space that can only be found in new construction.
COVID -19 ’s Ongoing Supply Chain Impacts
COVID-19 has undoubtedly had a significant impact on supply chains around the world over the last year. Ships have been backed up at ports, semiconductors are in short supply, steel pricing and lead times have been impacted, and lumber prices hit a record high.
With that said, industrial tenants involved with a variety of supply chains do appear to be catching back up with demand. Manufacturers that were forced to reduce or suspend production due to the pandemic have now started to ramp back up. Suppliers and warehouses vital to the e-commerce supply chain have continued to lease space and prioritize last-mile capabilities to address the growing needs in that sector.
From a development standpoint, the increased lag times and prices for building materials is continuing to impact industrial development in Austin. Although pricing for supplies like lumber, metal and concrete are on a downward trend, they are still mostly above where they were pre-COVID-19. Developers have expressed some concern with these prices, but with so much tenant demand for new construction it does appear that the fundamentals of development continue to make sense.
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Tesla Vendors Coming to Austin
Since Tesla announced in July 2020 that it was going to build a manufacturing facility in Austin, there has been constant speculation as to when Tesla-related vendors would be arriving in Austin and begin leasing warehouse space. It appears that question is starting to be answered as several Tesla-related tenants have been circling the market looking for space. Tesla’s vendors and companies hoping to gain synergies by locating near the Tesla plant have significantly increased demand for space in the region.
So far, two companies with a direct relationship to Tesla have leased a sizable amount of space in Austin:
- Plastikon Industries leased 98,380 sf in the Plum Creek Industrial Center. Plastikon, a plastic injection molding company in the automotive and healthcare industry, will create roughly 200 jobs at the location
- Simwon North American Corpo., another known Tesla supplier, also signed a lease at Plum Creek for roughly 500,000 sf in the development’s second phase. Simwon will employ an estimated 400 people at their new location.
Ed Latson, Executive Director of the Austin Regional Manufacturers Association (ARMA), says there are more companies on the way.
“Manufacturing in Central Texas is expanding at the fastest rate I have ever seen,” said Latson. “Tesla suppliers are moving to the region. The exact number is unknown, but most experts agree it will be more than 50 within the next few years, with several requiring significant space and people.”
Based on the tenant activity generated following the development of Tesla factories in other parts of the U.S., the estimate of 50 or more Tesla vendors landing in Austin is a distinct possibility. The benefits of Tesla selecting Austin for its Gigafactory will be felt far beyond the factory’s walls.
Large and More Numerous Tenants in the Market
Austin is experiencing a tremendous amount of tenant demand due to corporate relocations, local tenant growth, Tesla and semiconductor-related vendor requirements, and the continued rise of the e-commerce sector to support Austin’s growing population.
Based on AQUILA’s proprietary data on tenants in the market, there are currently 92 active requirements in the Austin area as of this writing, totaling 12.6 million sf with an average size of 137,446 sf. Of these requirements, 28 are willing to consider space across the entire Austin market, 26 are looking for space in Williamson County, 17 are hoping to secure space in the North or Northeast submarkets, and 14 requirements are focused on the Southeast submarket.
Breakdown by Square Feet
|100,000 – 250,000 SF||32|
|50,000 – 100,000 SF||21|
|< 50,000 SF||27|
Breakdown by Location
Our data shows the majority of companies in the market are in the manufacturing or distribution sector, with many users in the automotive, building materials, and e-commerce sectors. Roughly 1.7 million sf of the demand is known to be Tesla-related, which is a phenomenon that is expected to increase over the coming quarters as Tesla’s operations begin.
With this much demand in the market and a relatively limited amount of available space to absorb it, landlords are seeing an opportunity to increase rental rates while speed to market is key for new developments.
Industrial Absorption White Hot, Flex Absorption Starting To Pick Up Steam
In 2Q 2021, there was approximately 1,141,589 sf of positive net absorption region-wide for industrial space. This is higher than the impressive 975,729 sf of positive absorption we witnessed in 1Q 2021. The market is white hot and we are not seeing any signs of a slow down as e-commerce groups, local operations and Tesla-related companies continue to circle the market looking for space.
Flex absorption, which had a small gain of 43,864 sf in 1Q 2021, has now started to pick up steam. The flex market saw 253,772 sf of positive absorption in 2Q 2021, which is the most positive absorption experienced in this market since 4Q 2019. This increase marks three consecutive quarters of positive absorption, a trend which is likely to continue going forward.
A few notable leases this quarter include a 222,800-sf lease at Hays Logistics Center Building 1 by FedEx, a 56,721-sf lease at Crystal Park Building C by Three Way Logistics and a 42,000-sf lease in Pflugerville by The Boring Company (owned by Elon Musk). Amazon was also active in the market this quarter, leasing 160,000 sf at MetCenter II, Building 3 and 122,000 sf at Springbrook Corporate Center Building 2.
Vacancy Dips to an All-Time Low and Rental Rates Remain Steady
Vacancy and rental rates have continued to impress as all-time low vacancy rates are allowing landlords to hold or increase asking rental rates.
Region-wide flex space saw a vacancy rate of 4.6% in 2Q 2021, compared to 6.2% last quarter. The industrial market saw vacancy go from 4.9% in 1Q 2021 to 3.1% in 2Q 2021. Since AQUILA has been tracking the market, current vacancy rates appear to be nearing the lowest the market has ever achieved, especially when a number of recent deliveries are taken into account.
The largest drop in vacancy occurred in the Northeast industrial submarket due in part to the relative availability of space compared to the other major submarkets. The greatest increase in vacancy occurred in the Round Rock industrial submarket, as it was the only submarket to have negative absorption due to Crystal Park Phase 2 adding 69,000 sf of direct vacancy, which increased the vacancy rate slightly more than two percentage points.
Rental rates saw little change from last quarter. Region-wide industrial space went from an average base rate of $8.49 in 1Q 2021 to $8.58 in 2Q 2021, and flex space decreased slightly from $15.28 in 1Q 2021 to $15.20 in 2Q 2021. The high activity of tenants in the market and the shrinking availability of larger blocks of space have allowed landlords to remain firm on asking rents, and AQUILA expects rents to climb marginally over the next few quarters before more product comes online. The largest drop in rental rates occurred in the Hays County industrial submarket (down $0.14), and the largest increase in rental rates occurred in the Southeast industrial submarket (up $0.36).
While the overall Austin commercial real estate market continues to improve and shake off the effects of the COVID-19 pandemic over the last 15 months, the industrial market has grown by leaps and bounds during this time. Thanks to the continued rise of e-commerce, local and regional tenant growth, and the Tesla effect, activity in the Austin market is stronger than ever, and AQUILA believes it will continue to grow and remain strong through the remainder of 2021 and well into 2022.