Absorption in the first half of 2001 was 529,576 sf. But from July through December, negative absorption took over with about 890,748 sf vacated, leaving the market with a year-end negative absorption of 361,172 sf. It was the first six-month or annual negative absorption recorded by NAI/CIP since it began tracking the industrial market in 1975.The results are not surprising: higher vacancy rates, lower rents and a dramatic drop in new construction. The industrial market is composed of research and development, flex, bulk warehouse, office-warehouse and manufacturing-warehouse buildings.

Cheryl Morse, NAI/CIP's industrial specialist, tells GlobeSt.com that the travails of the industrial market seem to track those of the national economy. "There are less tenants in the market, and, of course, the ones that are there are slower to decide and they're doing smaller deals," she says. "And they are lesser-credit tenants. You don't get the big national companies. They're all holding off right now."

The direct vacancy rate for the whole industrial market was 15% (13% for the warehouse portions and 17% for the R&D and flex portions), a significant increase from 6% at the end of 2000 and the highest in at least five years. Add available sublease space and the total industrial vacancy rate rises to 20%.

Rents dropped in all categories except for manufacturing-warehouse, where the annual rate of $6 per sf to $9 per sf remained the same from 2000. R&D space rents ended 2001 at a $12 per sf average, down from $15 per sf in 2000. Flex space rented for $9.60 per sf at the high end in 2001, down from $10.80 per sf in the prior year. Bulk warehouse was $5.88 per sf at the end of 2001 and $6.96 per sf at the 2000 close; office-warehouse, $6.60 per sf versus $8.40 per sf.

As vacancies increase and rents dropped, builders put on the brakes, according to the NAI/CIP report. About 783,944 sf was under construction at the end of 2001, a 66% reduction of the mid-year total of 2.3 million sf. The projects now under construction should be ready by the end of the first quarter. The builders have responded by shutting down new construction. "That will ultimately help us as we work through this," she says.

The southeast submarket, which includes the area around Austin-Bergstrom International Airport and its cargo facilities, had a positive absorption of 279,247 sf for the year. Morse says that figure was buoyed by a deal waiting for construction to finish, which it did in the second half of the year. That submarket, however, has 427,344 sf under construction.

In deals that are done, tenants and building owners are looking for shorter-term leases, Morse says. Tenants don't want to lock into long-term leases because of the continuing uncertainty and building owners want leases that will see them through the downturn, but not lock them into low rates when the rebound comes.

Morse tells GlobeSt.com that she and other brokers have seen a higher degree of interest from prospective tenants since the beginning of the year. "They have more tours set up, they have more inquiries," she says. "The deals aren't necessarily closing, but there for a while it had come to a standstill."

She said there are indications that the national economy might be turning around, which should bring the Austin industrial market with it. "They're may be an opportunity for things to start going in the other direction," Morse says.

Instant Insights /

Industrial Market Smacked With First Negative Absorption Since 1975

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