The third quarter brought with it a continuation of Austin’s record industrial tightness.
Key Takeaways
- Tenant demand remained robust while vacancy levels remained historically low
- Rents increased across the board, with a notable increase in market escalations to keep pace with rising inflation
- Development interest in the Austin MSA continues to grow, with many new developers hunting for developable land
The Boots On The Ground
Our “Boots on the Ground” viewpoint is the voice of our experts, who have broken down the market data and compared it to what they are seeing for themselves. This is their take on what the numbers actually mean for the Austin industrial market.
The third quarter brought with it a continuation of Austin’s record industrial tightness. Tenant demand remained high amongst users of all sizes, while supply remained extremely tight as the market awaits a slew of new deliveries in mid- to late-2022. Given tenants’ growing appetites for space, coupled with sustained increases in construction costs, the market of 2nd generation spaces available throughout the Austin MSA was again in short supply this quarter, as many groups sought to avoid the high costs of constructing tenant improvements from shell condition.
Market Indicators
Historic Comparison
Unemployment Rate
The Market at a Glance
Rents increased again over the quarter in response to the tight supply, but perhaps more notably, we witnessed a significant increase in market rent escalations. Whereas annual rent escalations had been hovering around the 3.0% mark for the trailing 12 months, the third quarter introduced some landlords pushing asking rent escalations to 3.5%-4.0%.
From the landlord perspective, this is all just an effort to keep up with inflation. With many long-term in-place rents significantly below-market, coupled with an expectation of a sustained inflationary period, we forecast that the trend of higher rent escalations will likely continue through the end of this year and into next. As market demand showed no signs of slowing, developers remained hungry for developable sites, though rising land costs and a lack of infill land opportunities continued to push the geographic boundaries of the market. The Georgetown, Hays County and northeast/far northeast submarkets remained under the microscope of developers, especially those with an interest in developing bigger-box buildings.
All this lands against the backdrop of significant corporate relocations to the Austin area and continued population growth. In addition to Tesla – which has been a significant driver of industrial activity over the last 12 months – rumors are now swirling of a Samsung fabrication operation that appears to be homing in on Taylor, TX, about 30 miles northeast of downtown Austin. Should these rumors prove to be true, it could be a major boon to all the development groups working on projects anywhere on the outskirts of the north and northeast reaches of the market.
Future Forecast
Appetite for industrial space – both amongst users and landlords – shows no signs of slowing, and it likely won’t be until the larger deliveries in 2022 come online that there is any kind of temperance on the market’s industrial economics.
Absorption, Supply & Demand
Demand for space remained extremely high across size ranges, while available space continued to dwindle. Despite a sizable development pipeline
that is set to begin delivering in earnest in the 2nd half of 2022, the lack of space in Q3 led to a notable uptick in rents and market escalations across size ranges. Q3 continued the fervent pace of absorption we’ve seen in the previous two quarters of 2021, which we estimate will set a new record for absorption at the year’s end.
Speculative Development Pipeline
