Austin Industrial Space Check-Up or Hick-up?

Back in 2022, Austin saw strong numbers in the industrial space market. Vacancies were down and rental rates were up.  Samsung and Tesla helped attract other companies with their supply chain verticals to the Austin market. They continue to do so, but the deal velocity is showing signs of slowing. ¹ This is mainly because of sustained high interest rates and tightened credit standards along with overall concerns of a softening of the economy.  

In this article, I will focus on how Austin/Central Texas is doing relative to the national market. I find it helpful to “get out of the bubble” of our area. It helps with understanding what’s going on in various markets and why companies choose locating or expanding into one market versus another.

I will start with rental rates. Nationally, the average rental rate for industrial space is $9.50/ft/yr. ², but in Austin, it is $11.00/ft/yr. Vacancy rates nationally are 4.3%, while coming in at 7.7% in Austin. One might think that because Austin has a higher vacancy rate, their rental rates would be lower, but since Austin has more flex and manufacturing space than the national market, it makes it more expensive than the more prevalent distribution lease space available nationwide.

A very telling statistic revealing a slowdown nationally is construction starts. In the first half of 2022, 211 million sq.ft. was built, but this number slowed to only 109 million sq.ft. constructed in the first half of 2023. However, leave it to Austin to buck that trend. In the first half of 2022, 13.2 million sq.ft. was constructed in Austin which increased to 18 million sq.ft. in the first half of 2023. The numbers make sense when you consider that Austin has been playing catch up post-COVID responding to pent up demand from Amazon, Telsa, Samsung, etc. and understanding that commercial development takes years of planning making it very hard to “stop on a dime” and abort development plans when you are so close to breaking ground. What this increase in supply heading into the latter half of 2023 means is a possible oversupply situation that would cause rental rates to decrease.

Looking to purchase commercial space? High interest rates (currently in the 7 to 9% range) are keeping many investors on the sideline. This will hopefully cause owners that need to sell to reduce their asking prices. Currently, average sales prices for industrial property in Austin is $148/ft., while nationally it is $134/ft. Keep in mind, this average price per foot varies a lot on the level of build out of the property.   Properties with heavy power, a lot of air-conditioned office area will command a higher price.

As always, I am happy to talk with you about any commercial real estate needs you may have.  I can be reached at 512-736-5933 or oddo@toweratx.com

Source Citations

¹ – Costar, August 22, 2023, “Industrial Market Report, Austin, Texas”

² – Evelyn Jozsa, June 27, 2023, “Industrial Development Continues to Slow as Demand Normalizes”