Austin Industrial Report Q3 2023
Vacancies Increase as New Construction Projects Deliver
Q3 2023 Austin Industrial Report
Metric Q2 Q3
Vacancy Rate 7.2% 8.2%
Market Rent/SF $14.25 $14.26
Sale Price/SF $161 $196
Cap Rate 6.89% 7.12%
Key Takeaways/Updates:
1. Vacancy Rate Rising: The vacancy rate continued to rise in the 3rd quarter, and I expect this trend to continue. Vacancies are projected to increase into 2024 as new construction continues to come online. See “New Construction” below.
2. Market Rent: Rental rates per sq foot have finally started leveling off. With all the new supply coming online, I expect to see rental rates remain generally flat and possibly decline slightly as the market works through absorbing the new supply.
3. Cap Rate Expansion: Industrial Cap Rates for our market are now over 7%. Given the lack of transaction volume getting a solid handle on cap rates is difficult. If interest rates do not come down in 2024 it is likely cap rates will continue to expand causing further erosion of value for industrial assets.
4. New Construction: There are currently over 20MM sq ft of new industrial projects under construction (but appx 6mm sq ft of this is owner occupied and not spec lease development). However, new construction starts have declined by nearly 60% year over year with just over 2MM sq ft for this quarter.
For Owners/Landlords: Be prepared to see rental rates flatten out as new product comes online and the vacancy rate increases. Most of the new speculative development is focused on larger square footage spaces (+100k SF) and owners in this segment should anticipate longer lease times. Conversely, for the smaller flex/industrial space (<50,000 SF), there is much less new construction of this product type and demand remains very high. Over the past 12 months 40% of total leasing volume was for space of less than 50,000SF. As such, lease times are expected to be shorter and lease rates should hold up better for this market segment.
For Tenants: With the supply of new product coming online driving overall vacancy rates up, for the first time in several years larger 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. Even among users of smaller space, there are more options available in the market. It is a very good time for tenants to be in the market.
For Investors: The Austin industrial market has been very competitive the past few years making it difficult to buy assets. The recent rise in interest rates has disrupted the capital markets making it much more difficult to obtain financing. Even when financing is available, many projects no longer make financial sense given the increased cost of capital. With fewer buyers competing for assets, now is an excellent time for well capitalized investors to look to pick up industrial assets. I have seen recent signs of motivation and flexibility among certain sellers. We are a long ways from distress among sellers, but I am seeing assets priced more aggressively and sellers more willing to entertain offers at higher cap rates.
Long term perspective: Though the pipeline of new development for industrial assets is significant, the demand for industrial space remains high and I think that demand will absorb the oncoming product. Between the tighter lending environment and robust development pipeline, developers in Austin have already begun pulling back on new projects. Austin’s attractiveness to businesses, thanks to factors like its population growth and highly educated work force, leads me to believe that demand for industrial space will pick back up in 2024, especially for manufacturing and distribution. I think the outlook for owners of the smaller sized spaces (less than 50,000 SF) is likely better than for the larger spaces (+100,000SF) mainly due to the mismatch of excess supply of the larger space and not as robust of demand for that size of space. For smaller space the supply remains tight, the construction pipeline is active but not overbuilding, and the demand from users remains strong.
(Data courtesy of CoStar and current as of 10/23/23)