This article first appeared on page 14 in the February 2020 issue of Texas Real Estate Business magazine
By: Sam Owen, Senior Vice President, Stream Realty Partners
When real estate professionals contemplate the nation’s top industrial markets, Austin is not the first market to come to mind. Bigger and more established markets like Dallas, California’s Inland Empire, Chicago and Houston are often the newsmakers with tens of millions of square feet of industrial product under construction and tenants routinely signing deals for million square foot plus deals.
Austin has been mostly known and admired for its office market and tech-forward economy, gaining notoriety circa 2000 with the tech boom and exploding in growth over the last five years with expansions and commitments from Apple, Google, Facebook, Indeed, Amazon, Oracle, Charles Schwab and Expedia.
However, Austin’s emergence as one of the nation’s best cities to live in with ample opportunities for high paying employment has resulted in astounding population growth — one of the biggest drivers for industrial real estate. As the population expands so does demand for goods and materials that are stored in warehouse buildings, and the Austin industrial market will certainly benefit from this trend for the foreseeable future.
Per the Texas Demographic Center, the Austin metro population stood at roughly 1.25 million people in 2000. It is anticipated that the metro area will be home to 2.25 million people following the 2020 census.
Utilizing data from CoStar Group and excluding owner-occupied buildings from the count, the Austin industrial market consisted of 437 properties totaling 24.2 million square feet at the beginning of 2000. Fast forward to the beginning of 2020 using the same metrics, and the industrial market has 707 properties totaling 44.7 million square feet.
On average, the market has added a little over 1 million square feet of new product annually for the last 20 years at an average building size of 75,000 square feet. As consumer behavior continues to shift to prioritize same-day deliveries and construction moves in tandem with population growth in the metro area, the industrial market will need to further expand to accommodate larger users seeking modern facilities.
These positive market dynamics are not a secret to investors or developers. But Austin and the surrounding cities remain difficult places to develop. Permitting, land costs, topography, utilities and roadway infrastructure also represent barriers to entry that keep industrial development in check.
Additionally, given the typical size requirements of Austin’s industrial tenants and footprints of its buildings, it is difficult for institutional investors to deploy large amounts of capital on standalone deals for either existing product or speculative development.
From an investment perspective, the largest industrial acquisitions in Austin in recent years were part of larger multi-market portfolios. Examples of these deals include Blackstone’s 2019 acquisitions of GLP and Colony Capital, as well as AEW’s acquisition of a portfolio from TA Associates that included 420,000 square feet in Austin. Investors looking to participate in the growth of the Austin industrial market will need to consider smaller investment opportunities and target development sites that can be built out in phases over several years.
Industrial tenants in the Austin area face challenges as well as they look to grow their businesses in lockstep with the expanding economy and population. The market vacancy rate has remained under 10 percent for the last several years despite an active development pipeline. Class A vacancies offering higher clear heights, ample loading and larger truck courts are difficult to find as well. Tenants are faced with rising rental rates, taxes and construction costs along with longer timelines for permitting and construction.
Tenants that occupy more than 50,000 square feet will often need to look in multiple submarkets to ensure a competitive process. These tenants and their brokers will need to adapt in order to remain successful — a process that could include securing space well in advance of lease expirations, implementing multi-location strategies or securing space in new developments that are more frequently located outside the city. Viable suburban submarkets include Buda, Kyle, Pflugerville and Round Rock.
Recent tenant activity outside the city of Austin includes deals with SmileDirect (160,000 square feet), The Home Depot (85,000 square feet), Rosendin Electric (60,000 square feet), Carrol Tire (75,000 square feet) and Amazon (3.8 million square feet in a build-to-suit). Four Hands Home Furniture has leased the most space within the city over the last 12 months, taking over 275,000 square feet in multiple buildings at Southpark Commerce Center.
The Austin area may not be the biggest industrial market in the country, but it is a dynamic market that will continue to grow and diversify as the population swells. Investors and tenants in the industrial space will also benefit from Austin’s exposure to the technology industry, high-tech manufacturing, quality of life, business friendly environment and access to talent given from the region’s multiple universities.
While the last 20 years have led to a larger and more diversified industrial market, we foresee the next 20 years solidifying Austin as a very desirable metro for both tenants and investors.
This article first appeared in the February 2020 issue of Texas Real Estate Business magazine.
SOURCE: Texas Real Estate Business Journal