Silver Linings in the Clouds: Why Now Is the Time to Lean In
I think now is an excellent time for investors to lean into the industrial commercial real estate market in Austin. Let me explain.
If you have paid any attention at all over the past several years to the Austin commercial real estate market, you know that it has been a hotbed of activity, with investors clamoring to get in on the action. Too many buyers chasing too few deals and investors nearly elbowing their way into being the top bidder. This has certainly been the case in the industrial asset class and particularly so in 2021 and 2022. However, dark clouds may be looming on the horizon in the form of an economic slowdown or recession. While this may seem like cause for concern, I think that smart and committed investors who lean into this market during this time should be very well rewarded in the long run.
It's true that the potential for an economic downturn is a cause for caution. There are numerous reasons to be concerned right now. Certainly the office market has structural issues with severe overhand of excess supply in the form of new development as well as millions of feet of sublease space available in the market. That is a different asset class, however, and not one that I think investors should necessarily be leaning into right now. There is also a tremendous amount of concern currently over the banking crisis, particularly as it relates to the regional banks and the fact that they are a significant source of financing for the commercial real estate market. I believe the credit and lending environment is certainly something to keep on our radar, and be mindful of, but it is certainly not a reason to completely withdraw from investing in commercial real estate. If history has taught us anything, it's that these types of downturns are often short-lived. It has also consistently shown that investors who lean into opportunities in times like these are usually right over the long-term. Austin’s economy is very vibrant and dynamic, and I think it likely that any recession or slowdown may only last 9-12 months. Investors who make strategic, thoughtful investments during this time should see significant returns 3-5 years from now.
The dark clouds on the horizon don't mean that the future of Austin's industrial real estate market is completely bleak. In fact, there are many reasons to be optimistic about the potential for growth in the market. One of the driving forces behind this growth is the influx of large companies that have moved or are moving to the area. Tesla's Gigafactory just East of town, for example, has brought thousands of new jobs to the area (and will likely continue to do so as more suppliers relocate here). Similarly, Samsung has been a major employer in Austin for years, and now with their multi-billion-dollar chip fab project Northeast of town their impact on the area’s economy will be even greater. These companies will continue to be economic drivers for years to come, adding new jobs and bringing other new businesses to the area as their vendors and suppliers.
The growth of Austin's technology sector has also been a major factor in the city's economic growth, which has had a ripple effect on the industrial commercial real estate market. Companies like Google, Meta, Apple, and scores of others have substantial presence here and that has different tremendous demand for datacenters (another type of industrial real estate). Recently Skybox and Prologis announced a multi-million square foot datacenter project in Hutto, in addition to their site already being developed in Pflugerville (North of Austin). As more and more technology companies move to the area, the demand for industrial space to support their operations increases. This includes everything from warehouses and distribution centers, to research and development facilities, to datacenters.
Beyond just the technology sector growth, the recent trend of “onshoring” or “nearshoring” manufacturing has sparked tremendous development activity throughout the greater Texas region (with high density of activity along our side of the border and in Mexico). This is particularly true in the Austin area. Several million square feet of industrial space are already under construction. Some of these new buildings will be used as manufacturing facilities. But as manufacturing activity in the area increases, so too does the need for industrial space to store and distribute the input materials being used in the manufacturing as well as the finished goods being manufactured. According to those involved in economic development in the area, this new development supply that is already in the development pipeline is still only a fraction of what they are seeing demand for by companies interested in relocating to or expanding in the area.
Another factor driving demand for industrial real estate in Austin is the growth of e-commerce. With more people shopping online than ever before, the need for warehouses and fulfillment centers has skyrocketed. This has been especially true over the past couple of years, as the COVID-19 pandemic accelerated the shift to online shopping. As a result, industrial real estate in Austin has remained in high demand despite the economic uncertainty the pandemic brought.
Of course, investing in industrial real estate in Austin is not without its risks. The dark clouds of a potential downturn may be cause for caution, but they shouldn't dissuade investors from making smart investments in the market. Now is the time to lean into this market. Now is the time to capitalize on this opportunity. Careful evaluation of each potential property is essential, taking into account factors like location, access to transportation and utilities, and zoning regulations. I identify industrial investment opportunities in the market for my clients, help them evaluate them, underwrite them, and guide them through the process of acquiring them.
Let me wrap this up by saying, while the current economic climate may have some investors seeing dark clouds on the horizon, there are still many reasons to be optimistic about the potential for growth in Austin's industrial real estate market. The influx of large companies, the growth driven by “onshoring” of manufacturing, and the growth of the technology and e-commerce areas are driving demand for industrial space. While there are risks involved in any investment, the potential rewards make it a market worth considering now and in the coming months. So, for those willing to take a calculated risk and make smart investments, the dark clouds on the horizon could lead to sunny skies in the future.
Brian Smith is an investor, developer, and commercial real estate agent who specializes in the industrial market in Central Texas. You may contact him at www.atxwarehouse.com or on Twitter @brianesmith92