Austin Industrial Report Q2 2023

Vacancy rate doubles. Why the sky isn’t actually falling.

Q2 2023 Austin Industrial Report

Metric                                   Q2 Reading                        Last Qtr

Vacancy Rate              7.2%                                      5.3%

Market Rent/SF            $14.25                                  $14.14

Sale Price/SF                 $196                                     $157

Cap Rate                       6.89%                                   6.80%

Key Takeaways/Updates:

1.       Vacancy Rate Doubles: The Q2 vacancy rate of 7.2% is more than double the 3.4% vacancy rate in Q1 of 2022. Vacancies are projected to increase into 2024 as new construction continues to come online.

2.       Market Rent: Despite the large amount of new industrial construction coming online, market rental rates are not projected to decline in the near term. Rather, continued strong demand is anticipated to absorb much of this supply and market rents are anticipated to be flat through 2024.

3.       Cap Rate Expansion: Since bottoming at 6.2% in Q1 2022, cap rates have expanded during this past year’s increasing interest rate environment. The increase from 6.2% to almost 6.9% represents a decline in value of approximately 10% for industrial assets.

4.       New Construction: There are currently 18MM sq ft of new industrial projects under construction (this is a 75% increase over the 10.1MM sq ft under construction in April 2022). In the last 12 months net absorption was 5.4MM sq ft. Though absorption is projected to run higher in the coming 12 months, demand is not anticipated to be sufficient to absorb all of the new supply.

For Owners/Landlords: Be prepared to see rental rates flatten out as new product comes online and the vacancy rate increases. Higher quality assets and spaces with unique value-add characteristics (like a fenced yard) should continue to experience higher demand. Older product and assets in submarkets with higher vacancies should be prepared to offer more aggressive lease terms to fill their units.

 For Tenants: With the supply of new product coming online driving overall vacancy rates up, for the first time in several years tenants should have the privilege of more selection in the market. Though it isn’t likely to become a “tenant’s market”, it is anticipated that landlords will likely be more receptive to offers requesting flexible terms and incentives. It is a very good time to for tenants to be in the market.

 For Investors: The Austin industrial market has been so competitive and tight the past few years that it has been very difficult for many investors to purchase properties. Given the amount of new product coming online, and the current interest rate environment, for investors who are well capitalized and able to move decisively, now is an excellent time to look at adding to their industrial commercial real estate holdings.

Long term perspective: Despite the current headwinds and challenges, the long-term outlook for the Austin industrial market is very strong. The real impact of the Samsung chip fab coming online has yet to be realized. As suppliers for Samsung and Tesla move into the area and establish their operations the industrial growth will continue. My firm is very active in the Taylor area and sees much of what is coming in the pipeline. Williamson County will benefit greatly. This economic growth will not just benefit the industrial sector but should benefit the economy as a whole.

(Data courtesy of CoStar and current as of 7/13/23)