The adverse effects of the COVID -19 pandemic continued to be felt throughout Austin in 3Q 2020, with the office, retail and hospitality sectors among the hardest hit. However, similar to 2Q 2020, the Austin industrial market remained strong and steady this quarter with region-wide industrial vacancy rates declining by 2.3% and leasing activity and absorption statistics skyrocketing.
E-commerce-related businesses continue to be a major driver of industrial leasing activity as online consumer spending surges and companies look to increase on-hand inventory. Also active in the Austin market were home goods, logistics and manufacturing companies looking to establish or expand their presence in Central Texas.
The July 2020 announcement that Tesla will be building its Gigafactory on 2,100+ acres in Southeast Austin drove developer interest to new levels in anticipation of demand for space from Tesla vendors.
As e-commerce tenants, such as Amazon, and Tesla’s vendors increasingly canvass the market for large blocks of available space, industrial developers are looking to suburban markets including Georgetown and Hutto to the north, Manor to the east, and the Hays County towns of Kyle and Buda to the south.
These markets are favorable because of their access to major highways and arterial roads. Land costs are also relatively low compared to the few remaining Austin infill sites. Due to the significant increase in large tenant requirements in the market, the development pipeline is robust, with several new projects planned for the suburban markets discussed above.
AQUILA expects Austin’s local economy to remain resilient, population growth to continue at a rapid rate, and large companies such as Tesla to continue to relocate to the market due to its geographic and economic advantages. This will undoubtedly increase demand for industrial space going forward, especially in light of the e-commerce and manufacturing boom in the market.
Industrial Absorption Remains Strong While Flex Struggles
Industrial absorption in 3Q 2020 was incredibly strong with 1,515,572 square feet (sf) of positive absorption throughout the Austin region. This absorption amount exceeded the previous six quarters combined as several large transactions accounted for this unprecedented gain.
Flex space absorption continued to lag at approximately 138,081 sf of negative absorption. This was the second quarter in a row for negative absorption in the flex sector.
Net Absorption Comparison
On a macro level, flex space has felt the negative effects of the COVID-19 pandemic more than industrial space. Bulk distribution industrial spaces with minimal office areas and a larger warehouse component are in higher demand than flex spaces with larger office portions due to demand from large distribution, e-commerce, and manufacturing companies.
The most significant flex deal of the quarter was the announcement that BAE Systems has leased a 390,000-sf building to be built in the Parmer Austin Business Park in Northeast Austin. (Note: Because the building will not complete construction until 2022, this transaction does not count toward flex absorption rates in 3Q 2020.)
The major transactions leading industrial growth in the 3Q 2020 were:
- Amazon’s full-building lease of 307,840 sf at Kyle Crossing Business Park Building 2 in Kyle
- Three-Way Logistics’ 130,438-sf lease at Crystal Park Building B in Round Rock
- Sauceda Industries’ lease of 126,364 sf at Southpark Commerce Center Phase III Building 3 in Southeast Austin
- Lowe’s Home Improvement’s lease of 119,113 sf at Kyle Crossing Business Park Building 1 in Kyle
Industrial Vacancy Continues To Decline as Rates Increase
The continuing strength of the bulk industrial market boosted average base rents from $8.47/sf in 2Q 2020 to $8.96/sf in 3Q 2020. The increasing activity of tenants in the market and the shrinking availability of larger blocks of space have allowed industrial landlords to remain firm on bulk rents and even push rents higher in certain submarkets.
Industrial vacancy rates decreased over 200 basis points from 8.6% in 2Q 2020 to 6.3% in 3Q 2020, with the largest drop in industrial vacancy occurring in the Hays County submarket. Vacancy rates in Hays County dropped from 17.1% in 2Q 2020 to 10.9% in 3Q 2020 thanks to the two sizable new transactions completed at Majestic Realty Co.’s Kyle Crossing Business Park Buildings 1 and 2.
Vacancy in the flex sector recorded a slight increase for the second straight quarter, from 6.2% in 2Q 2020 to 7.1% in Q3 2020. However, flex vacancy rates decreased notably in the Far Northeast submarket, from 5.2% to 1.4%, and from 11.3% to 9.5% in the Hays County submarket.
Despite overall flex absorption remaining negative and vacancy increasing slightly, flex rates rose from $14.11/sf in 2Q 2020 to $14.59/sf in 3Q 2020. This is the fifth straight quarter where flex rates have remained steady or increased despite fluctuations in absorption and vacancy. This can likely be attributed to landlords pushing rental rates in small flex spaces as leasing activity in this sector remains strong.
Unemployment Declines, Manufacturing Poised for More Growth
According to the Bureau of Labor Statistics, the unemployment rate in the Austin area was 6.4% at the end of 3Q 2020, a decrease from 7.3% at the end of 2Q 2020, and a significant decrease from the 12.2% unemployment rate at the beginning of 2Q 2020. It is still higher than the 2.6% unemployment rate at the end of 3Q 2019.
While the Austin area has seen a significant increase in unemployment compared to a year ago due to the pandemic, Austin continues to outperform both the state of Texas and the U.S., which recorded unemployment rates of 8.3% and 7.9%, respectively, for September 2020.
The Austin manufacturing sector remained strong during 3Q 2020, and it is poised to become even stronger when Tesla begins vehicle and battery cell production in late 2021 at their new 5 million-sf+ facility in Southeast Austin.
In a recent ARMA (Austin Regional Manufacturers Association) workforce survey, 86% of the corporations responding have maintained or expanded their workforce during the pandemic and 66% of respondents plan on increasing hiring in 4Q 2020. While 85% of the companies said their business is stable or expanding, over 80% of those same companies agreed that hiring will be a major concern in 2021 as major manufacturers such as Tesla enter the market.
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The continued rise in e-commerce activity along with the Tesla Gigafactory announcement has been a boon for the Austin industrial market in 3Q 2020. Tenant activity is incredibly strong with a myriad of distribution and manufacturing companies scouting the market for large industrial availabilities.
While the ongoing effects of COVID-19 were more noticeable in the flex sector, the overall Austin industrial market remained dynamic and outperformed other commercial market sectors in 3Q 2020.
As people continue to move to Austin, e-commerce purchases become more of the norm, and Texas’ favorable business climate attracts even more companies, the outlook for Austin’s industrial market remains favorable in the short term and beyond.