September 18, 2020

Round Rock Industrial Real Estate COVID-19 Impact Report

By: Brody Watson, Economic Development Intern

The impact of COVID-19 on the United States and Round Rock economy is one of the biggest impacts in history. The sudden negative demand and supply shock created a national economic recession that cannot be solved using an economic solution. The impact of COVID-19 on the economy is something that we have never seen before. The recession was caused by forced decreases in demand and supply from consumers and companies. The country went into a recession by choice instead of it happening naturally. What makes this recession interesting is the solution to the problem is obvious and under normal circumstances would be easily fixable. However, without a vaccine to the virus the economy will have to survive in its current state until one is made available. One thing that is keeping the economy from completely tanking is the ability for people to shop for everything online.

With the economy in a recession and unemployment spiking at around 11% in Round Rock, one of the industries that has continued to hold strong throughout with only minor impacts from COVID-19 is the industrial real estate market. Round Rock’s industrial real estate market has been a strong and stable industry for several years. This report explains the impact of COVID-19 on the Round Rock industrial real estate market. Data is pulled from CoStar, the Bureau of Labor statistics, JobsEQ, and other reliable sources to explain the impact of COVID-19 on Round Rock. This report will discuss what the impact of COVID-19 was on the economy, how or if it affected the industrial real estate market, and how this data represents this change.

Pre-COVID-19

The industrial real estate market prior to COVID-19 was strong both nationally and in Round Rock, with several years of stable growth. The unemployment rate for the United States has stayed around 4 to 6% for five years and Round Rock has been below 4% for five years as well. The market square foot price for Round Rock was on a constant rise from under $7 to $10.79 over a ten-year period. During this time, the market rent growth year over year was also positive since the fourth quarter of 2010. This means that every quarter since then the market rent price per square foot was higher than it was the previous year. Round Rock’s square feet under construction has continuously risen over the past five years. The one data set that shows a negative trend before the impact of COVID-19 is the vacancy rate. The vacant square feet and the vacancy rate have been increasing since the third quarter of 2015.

Post-COVID-19

The Round Rock and national economy had an immediate and evident negative impact from COVID-19. The national and local unemployment spiked, sales significantly decreased, and several small businesses closed nationally. One of the few industries that managed to do well compared to other industries was the industrial real estate market. The national industrial real estate market according to Newmark Knight Frank, has been doing well compared to other retail markets. Newmark also has said that the vacancy rate has been consistent for the past five quarters with no significant impact from COVID-19, and that net absorption is positive around 20 million square feet.

The National Association of Realtors classified the industrial property market as the “strongest asset class as demand for e-commerce sales rise.” While the national industrial real estate market was holding its own, the unemployment rate for manufacturing jobs had a rough impact from COVID-19.

Unemployment Rate

The unemployment rate for manufacturing jobs in the United States was on a steady decline for the past ten years reaching a low at 2.3% in May of 2019. In March 2020, the unemployment rate was 4.2%, then when COVID-19 impacted the economy the unemployment jumped up to 13.2% in April. This is a direct impact from COVID-19 and showed that the manufacturing job market was heavily impacted. At the end of August 2020, the rate dropped to 6.7%. Even though this is half of what the unemployment was at the height of COVID-19, the rate has not been this high since September of 2013. The increase in the unemployment rate has a strong potential negative impact on industrial real estate market. The significant decrease in employees leads to a decrease in production which turns into a loss of profit. This loss of profit can then lead to a vacancy of the building or property. If several businesses vacate their buildings, the price to fill those spaces decreases as does the overall market.

Market Rent

To really show the impact of COVID-19 on the national industrial real estate market is to look at the market rent per square foot price. In the United States, the pre-COVID-19 market rent per square foot price was $9.57 in the fourth quarter of 2019 and dropped to $9.42 in the first quarter of 2020. The price then increased in the second quarter of 2020 to $9.47. The year-over-year market rent growth was 1.3%. The United States and Round Rock had the same pattern for the market rent price per square foot. The price was at a constant increase then declined in the first quarter of 2020 and increased slightly in the second quarter. The year-over-year growth was positive for both, so the price was still higher than it was a year ago.

The industrial real estate industry in Round Rock is doing just as well and maybe even a little better. Round Rock’s industrial real estate market has been a strong and stable industry for several years. Since the fourth quarter of 2011, the market rent per square foot price for the industrial real estate market in Round Rock has had no decreases in price. The market rent per square foot price was $10.79 in the fourth quarter of 2019. This is the highest it has been in ten years by far. COVID-19 hits America, and shelter in-place is enforced, and it goes down for the first time in nine years from $10.79 to $10.66 in the first quarter of 2020 and then went up to $10.70 in the second quarter of 2020. It is forecasted to drop until the third quarter of 2021. The data for this can be shown below.

Vacancy Rate

Vacancy rate and vacant square feet tell the same story. The vacancy rate was 61.3% for second quarter 2020 as compared to 30.1% in second quarter of 2019, meaning the vacancy rate rose 31.2% in a year. The impact of COVID-19 caused the vacancy rate to increase by 22.5% from fourth quarter 2019 to the second quarter in 2020. The vacancy rate doubled in a year and more than two thirds of that was in the first six months of 2020.

At the end of 2017, the vacancy rate started to increase quickly with a couple small decreases, but then in 2019 it continued to increase and continued until Q2 2020. The vacant square feet in Round Rock shows the same trend. The vacant square feet in the second quarter of 2020 was 570,583 square feet. This is a significant difference from the fourth quarter of 2019 when it was 290,388 square feet. With the significant increase in the vacancy rate and vacant square feet, the data indicates that there was an immediate impact from COVID-19 regarding vacant square feet. The graphs for this data can be show below.

Net Absorption

Net absorption is the total amount of space that was moved in minus the total amount that was moved out. In the second quarter of 2019, the net absorption for Round Rock’s industrial real estate was 75,427 square feet. Net absorption was already negative at the end of 2019 at a negative 17,838 square feet in the fourth quarter. When the impact of COVID-19 hit, the net absorption dropped to a negative 81,077 square feet in the first quarter of 2020 and then went up to a negative 21,492 square feet in the second quarter. This may not be completely related to COVID-19 because every year for the past ten years there has been a quarter with a significant negative spike in net absorption.

The construction in Round Rock has continued to increase and show positive outcomes. Construction in Round Rock has been increasing for the past four years and the pattern did not change when COVID-19 hit. The data can be seen in the graph below.

Summary

The economy has been dealing with COVID-19 since the middle of March and during this time Round Rock has already met its business attraction, retention and expansion goals for 2020. This is a good sign for the state of Round Rock during this time. This goal was set before COVID-19 became a pandemic anywhere and the goal was met in August. To further show that the industrial real estate industry has been doing well during this time, five out of the seven new or expanding businesses in Round Rock this year were in the innovative manufacturing sector. This has shown that the Round Rock industrial real estate market is continuing to produce positive results.

The industrial real estate market in Round Rock pre COVID-19 showed great promise and had a strong growth. When COVID-19 hit the question of what industries would do well and which would not was on people’s minds. The impact of COVID-19 had a negative impact on the economy and certain industries, but the industrial real estate market was one of the few industries that has done well under the circumstances.

Based on the data in this report, the industrial real estate market had an initial impact from COVID-19 that was not significant and it was able to quickly bounce back and mostly recover. The market will not have the ability to completely go back to normal until there is a vaccine. The chamber predicts for the next couple of years that until there is a vaccine available, the market and the economy will continue to hold its own in the current state. This all depends however, on how well we can flatten the curve. The Round Rock industrial real estate market will continue to show promise and be one of the more successful industries. The market will show a little positive growth in the short time after the initial recovery from COVID-19, but then start to decrease until operations at or almost 100% what they were before.