AUSTIN, TX—At the beginning of the year, the Austin industrial market continue to slip as new development activity pressed on market-wide asking rates and vacancy, according to a recent CBRE report. Quarter-over-quarter, average asking rates fell $0.24 from fourth quarter 2019 per square foot to $9.56 per square foot in first quarter 2020. Vacancy increased 30 basis points to 10.8% in first quarter 2020, driven largely by the delivery of three southern metro projects totaling 432,919 square feet that were collectively only 20% pre-leased.

Despite slackening fundamentals, developers have remained bullish on the Austin market as five more projects kicked off during the quarter, bringing total active construction to approximately 1.2 million square feet. And, there was zero pre-leasing activity registered as of quarter's end.

"Developers continue to see value in investing in industrial product in this market. Although industrial and logistics has not historically been a large segment of Austin's commercial real estate business, it has seen significant growth over the last few years as a result of both e-commerce and Austin's positioning as a rapidly growing market," Scott Senese, senior managing director at CBRE, tells GlobeSt.com. "The industrial and logistics sector has been the focus of more in-bound capital, but we are seeing that investors are preferring mostly core big-box warehouses in primary and secondary markets in or near logistics hubs. We do expect to see a short-term slip in overall industrial leasing activity in Austin."

This, combined with more than 1 million square feet of projects under construction in the market, suggests an uptick in vacancy rates during the next quarter or two, he says. However, the industrial market will have a faster recovery than other commercial real estate sectors.

"E-commerce has seen a surge due to COVID-19 containment efforts and that's likely to continue," Senese tells GlobeSt.com. "As a result of this surge, the industrial and logistics sector is poised to see both short- and long-term benefits in many markets."

One Texas market to watch is El Paso, which was a top industrial and logistics market in 2019. As e-commerce grows and companies see the value in having warehouse/distribution space with easy access to the Mexico border, El Paso and the sister city of Ciudad Juárez across the border, will continue to see strong activity in the near future, Senese says.

From a national standpoint, the broad extent of pain points are still to be revealed.

"We are just beginning to see the full extent of disruption from this pandemic, and the second quarter will be very tough for commercial real estate and nearly all other industries," says Richard Barkham, CBRE global chief economist and head of Americas research. "A fall in the rate of infection in April and an easing of lockdown requirements in May and June will provide the basis for recovery in consumer spending in the third quarter. A huge and generous government stimulus program also will kick-start activity. However, there will be no quick fix in the real estate industry. US commercial real estate will need more than a year to get back to full strength and it will take several years for vacancy rates to fall back to their pre-crisis levels. The real estate recovery will be gradual and will lag the economy. That said, we expect value to be very resilient in the longer term."

Barkham says resilient asset classes such as industrial/logistics and multifamily will recover first. Harder hit industries like hotels and retail will take longer.

Industrial and logistics will have a short-term slowdown in leasing and a moderate increase in vacancies because of a large amount of new construction. The sector will be a net long-term beneficiary due to strong e-commerce growth and retailers focusing more on inventory control in a post-COVID-19 consumption environment.

"Thankfully, we already are seeing signs of recovery in China's real estate market since China was the first to experience many phases of this crisis," says Barkham. "China is beginning its return to normal. Office-leasing inquiries in China are on the uptick, site-inspection volumes in Shanghai are back to 70% of pre-outbreak levels and demand from tech companies for office space has been resilient."

Instant Insights /

Austin Industrial Slips As Development Peaks

Related Stories

Recommended For You