Positive Performance Indicates Healthy Industrial Sector

Milstead says strong fundamentals in the industrial market continue to support stable rents and new construction.

AUSTIN, TX—The Austin industrial market experienced a trifecta of positive indicators in the final quarter of 2015 including healthy leasing/sales activity, positive net absorption and improved occupancy. According to a survey performed by REOC Austin of more than 38 million square feet of industrial lease space, new leases and expansions generated 400,200 square feet of positive net absorption in the fourth quarter. Mark Milstead , senior vice president, industrial services, REOC Austin, a locally based commercial real estate company, tells GlobeSt.com: “Strong market fundamentals in the Austin industrial market continue to support stable rental rates and new construction heading into 2016 based on the trifecta of positive indicators in the final quarter of 2015 featuring healthy leasing/sales activity, positive net absorption and improved occupancy.” Leading the absorption charge was Educational Testing Services , which took occupancy of more than 150,000 square feet in the newly completed Expo 10 and 11 buildings. This activity contributed to the strong fourth quarter performance of the Southeast sector which led all sectors with 320,329 square feet of positive net gain. The Northeast sector also recorded notable leases including the expansion of Javelin Logistics with 51,940 square feet at Tech Ridge 4.1 and Levantina USA with 29,781 square feet at Northpointe Trade Center B .  For the year, the Austin industrial lease market experienced a net change in occupied space totaling 1,458,958 square feet–nearly matching the total net gain recorded for the past two years combined. Healthy leasing and positive absorption are manifested in the improved citywide vacancy rate, which tightened from 7.5% in the third quarter to 6.9% at year end, says REOC Austin. The current vacancy rate is substantially improved compared to 10.9% recorded 12 months earlier and is especially significant considering that new construction delivered more than 552,000 square feet throughout the course of the year, including the fourth quarter delivery of MetCenter II Building 3 –a 160,000-square-foot flex/R&D building. Warehouse properties dominated leasing activity in the fourth quarter tallying 431,772 square feet of positive net gain, says REOC Austin. Demand eclipsed new supply by a margin of nearly 3 to 1 with absorption of warehouse space totaling 1,143,944 square feet at year-end compared to 392,205 square feet of new warehouse inventory added to the market through the course of the year.  As a result, warehouse properties closed the year with an incredibly tight citywide vacancy rate of 5.6% which is down from 7.1% last quarter and 9% recorded in the fourth quarter of 2014. Flex/R&D properties, on the other hand, experienced a setback of 31,572 square feet of negative net absorption in the fourth quarter which offset gains from earlier in the year and lowered the year-end total gain to 315,014 square feet, says REOC Austin. As a result, area flex/R&D properties closed the year with a citywide vacancy rate of 9.4%. This is an increase from 8.4% last quarter but it remains considerably improved compared to 14.6% recorded a year ago. While quoted rental rates fluctuate a penny here or there, no significant change was measured compared to the previous quarter; however, upward pressure on rents will increase as vacancy rates continue to tighten.  The cost of renting office warehouse space currently ranges between $0.50 to $0.65 per square foot per month on a triple net basis, while the price for bulk warehouse ranges between $0.45 and $0.60, according to REOC Austin.  Asking rental rates for area flex properties range between $0.80 to $1.10 per square foot per month. Looking ahead, strong market fundamentals continue to support additional speculative development. There are currently two major buildings under construction totaling 202,000 square feet including  MetCenter II Building 12 , a 72,000-square-foot flex/R&D building, as well as Expo 12, a 130,000-square-foot warehouse building, both located in the Southeast sector.  In addition, several more projects are expected to break ground in the year ahead including Tech Ridge 2.1 (with 76,400 square feet) and Tech Ridge 3.1 (at 115,200 square feet). “Austin’s positive performance and long-term economic outlook keep investors interested in local industrial assets,” says Jerry Heare , SIOR, senior vice president, REOC Austin.