If there was one buzzword to describe the Austin industrial market in 4Q 2020, it would be “Tesla.”

The electric car manufacturer announced earlier this year it had selected Austin for the site of its new Gigafactory, a massive facility on 2,200 acres. The building is currently under construction along SH-130 where the Cybertruck and Model Y Tesla vehicles will be built. While the scale of the facility and its effects on the Austin industrial market are yet to be fully understood, there has been a flurry of activity related to the announcement from tenants, developers, and investors alike.

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

Tesla’s decision to build its new Gigafactory in Austin has prompted a land grab from local, regional, and national investors and speculative developers of industrial properties. Much of the focus has been on the SH-130 corridor in close proximity to the Tesla site; however, there are several notable industrial developments slated in Williamson County (Georgetown) and Hays County (Kyle and Buda). These submarkets offer a pricing discount compared to more centrally located sites. These locations also remain attractive due to their proximity to Austin and their more business-friendly environments. Tenant activity has been impacted as well, with dozens of Tesla suppliers and affiliated companies entering the market to search for large blocks of industrial space.

Although Austin’s industrial market has historically been seen as a secondary market compared to the likes of Dallas and Houston, it is quickly starting to “grow up” and emerge as one of the key industrial markets in Texas. More developers are snatching up large land tracts, larger buildings are being planned, and the size of tenant requirements in the market has increased drastically. While the effects of the pandemic continue to be felt on a macro basis, Austin’s economic resilience and strong dynamics will continue to benefit the Austin industrial market as we move further into 2021.

 

Industrial Absorption Still Strong, Flex Absorption Starting To Rebound

In 4Q 2020, there was approximately 638,339 sf of positive net absorption region-wide for industrial space. This is lower than the impressive 1.4 million sf of positive absorption we witnessed in 3Q 2020. But, it is still a strong indication of the market’s health and is far above what the Austin office market has seen in recent quarters.

Flex absorption, which had been negative for most of 2020, has now started to rebound. The flex market saw 203,000 sf of positive absorption in 4Q, which is the most positive absorption we’ve seen in this market since 4Q 2019. This increase doesn’t fully offset the negative absorption experienced previously in 2020, but it does bring the annual total closer to a positive value.

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).

 

Vacancy and Rental Rates Remain Steady

Vacancy and rent seem to have leveled out at the end of the year, with both flex and industrial spaces remaining relatively steady compared to last quarter.

Region-wide flex space saw a vacancy rate of 6.5% in 4Q 2020, compared to 7% last quarter. The industrial market saw an even smaller change in vacancy, going from 6.7% in 3Q 2020 to 6.6% in 4Q 2020. While both building groups saw positive net absorption, both groups also grew in size due to new deliveries, and offset some of that absorption.

The largest drop in vacancy occurred in the Round Rock industrial submarket due in part to the 56,721-sf lease by Three Way Logistics at Crystal Park Building C. The greatest increase in vacancy occurred in the Georgetown industrial submarket, with Innovation Business Park Building 2 delivering with a vacancy of 212,344 sf.

Rental rates also saw little change from last quarter. Region-wide industrial space went from an average base rate of $8.92 in 3Q 2020 to $8.53 in 4Q 2020, and flex space increased from $14.59 in 3Q 2020 to $14.84 in 4Q 2020. While change did occur, it isn’t notable and is likely due to changes in availability rather than actual change in the market from last quarter. 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.

The largest drop in rental rates occurred in the Northeast industrial submarket (down $0.86), and the largest increase in rental rates occurred in the Round Rock industrial submarket (up $0.95).

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

 

Unemployment Declines, Manufacturing and Service Sectors Lead

Unemployment continued to decline in 4Q 2020 with new hires in the manufacturing and service sectors leading the way across Texas. The latest Beige Book report from the Federal Reserve Bank of Dallas states that, apart from the energy sector, the majority of Texas businesses expect to add jobs in 2021, while 38% of businesses expect to maintain their current headcount. Only 10% of the businesses surveyed expect to have declines in their workforce during that period.

 

Unemployment Rate Comparison

Austin Unemployment Rate | Austin industrial market in 4Q 2020

 

The Bureau of Labor Statistics reports that the preliminary unemployment rate in the Austin area was 5.1% at the end of 4Q 2020. This is a 120-basis-point decrease from 3Q 2020, but it remains above the 2.4% unemployment rate at the end of 4Q 2019.

The Austin MSA has experienced a steady decline in the unemployment rate after a high of 12.2% in April 2020 during the initial fallout from the COVID-19 pandemic. Continuing a trend, Austin outperformed both the state of Texas and the U.S., which recorded unemployment rates of 7.2% and 6.7%, respectively, for December 2020. Within Texas, Austin’s 4Q 2020 unemployment rate also ranked below most metropolitan areas including Dallas, Houston and San Antonio.

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

In 2021, the Austin manufacturing sector is expected to keep up the hiring pace with the Tesla plant coming online later in the year and their selected vendors ramping up operations in facilities around the city. The effect Tesla will have on the industrial labor pool remains to be seen, but the competition for employees with e-commerce companies and others is likely to be fierce.

 

Industrial Market Is Strong and Growing

Despite the hardships that the Austin market 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.

In conjunction with this growth, the prevalence of e-commerce in our day-to-day lives continues to increase as well. According to Digital Commerce 360 and U.S. Department of Commerce data, the first half of 2020 saw e-commerce sales increase 30% compared to the same period in 2019.

Combining these two variables together leads us to believe that industrial space is going to continue to perform well moving into 2021. Since more people means more packages and more packages means a greater need for storage and logistics, industrial space still shows no signs of stopping its growth in the Austin market.

This continued growth of e-commerce combined with the “Tesla effect” will have a noticeable impact on the industrial market in and around the Austin area.

 

WANT TO READ OUR LATEST INDUSTRIAL REPORT? 

Do you want to see the latest data and insights about the Austin Industrial market? You can download a free PDF copy of our latest report below.

Download the Latest Industrial Market Report Now
 

 

Closing

The Austin region’s industrial market has been a whirlwind of activity in 2020. Major players like Amazon, Tesla and FedEx, as well as major retailers like Lowes that have committed to an increased focus on e-commerce, are causing a rise in demand for industrial space in the region. The number of new requirements in the market mixed with the increasing prevalence of e-commerce leads us to believe that the industrial market will continue to perform well in 2021.

 

New Call-to-action
New Call-to-action


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.

Recent posts from Leigh


Related Content


Want the latest from the AQUILA Learning Center?

We’ll send you one email a month featuring our best content from the month before. You can also manage your subscription preferences.