The saying, “Everything is bigger in Texas,” is certainly true when it comes to industrial construction activity. Demand for industrial space has simply been overtaken by the sheer amount of new supply. All told, more than 69 million square feet of new product has come online in the first half of 2023; meanwhile, demand continues to normalize from record levels. In-turn, this has led to a steeping in vacancy rates, which stands at 6.5% at the end of 2023’s second quarter and compared to 5.0% at year-end 2022. Despite rising vacancies, asking rents continue to tick higher at a double-digit percentage clip. According to Wall Street Journal article “Why Warehouse Rents Keep Going Up While Demand is Dropping” there are three key factors driving this trend: Tight market conditions, asking rents tied to new product and operators basing leasing decisions on long-term prospects rather than short-term market conditions.   

Turning to leasing, the state of Texas recorded a 11.8% pullback during the trailing 12 months, as compared to the previous year period. By market, the largest decline in overall leasing activity occurred in Houston followed by DFW. On the other hand, Austin was the only market with an increasing pace of leasing volume. Key takeaway: as tenant demand normalizes, vacancies rise, and developers pare back projects expect market rent growth to decelerate.

Austin

Austin’s pace of tenant expansions remained strong; however, early signs of slowing demand are beginning to emerge. As previously mentioned, Austin is the only major metro to show increasing TTM leasing activity, but first half of 2023 is looking more subdued. Year-to-date, new leases signed totaled 5.0 million square feet–impressive on a historical basis–but represents a 14% decline when compared to the first half of 2022. Also in play is the lag time between executing a new lease and move-in, resulting in lackluster absorption figures.

Combining a slowdown in demand with rapid expansion of new product, vacancy stood at 7.7%, an increase of 260 basis points from year-end 2022. Furthermore, the construction pipeline remains at record level with 171 properties underway, representing 18 million square feet. With only 40% of the construction pipeline pre-leased, completions will remain a near-term risk to rising vacancies and weakening rent growth. By submarket, the supply overhang appears to be most pronounced in Hays County, Southeast Austin, and Georgetown.

Turning to rental rents, the average asking rental rate for available industrial space was $12.96/SF at the end of second-quarter 2023, down 0.2% from a year ago. With asking rents plateauing, we expect a 2.0% decline over the next year, the largest pullback in the state.

Dallas-Fort Worth

Like statewide trends, the vacancy rate in DFW increased as deliveries outpaced demand. In second quarter 2023, net absorption reached 5.8 million square feet. For comparisons, this is significantly below the five-year average of 8.4 million square feet. More concerning, this marked the third consecutive quarter of declining absorption. Meanwhile, deliveries tallied 16.6 million square feet pushing the vacancy rate to 7.4% compared to 5.4% just two quarters ago.

Moving forward, expansion of the existing inventory base is poised to weigh on the market. In-place construction is elevated with 64 million square feet of new product underway and stands at only 23% pre-leased. The largest concentration of construction activity is taking place in NE Tarrant/Alliance (50% pre-leased) and South Dallas (9% pre-leased) presenting some near-term challenges to overall fundamentals.

Turning to rental rents, the average asking rental rate for available industrial space was $8.93/SF at the end of second-quarter 2023, up a staggering 21% YoY. At this point in the cycle combined with an elevated construction pipeline, asking rents in DFW look stretched by any account. We expect face rents will give up some of the gains over the next year but regain a growth trajectory in 2025 as demand catches up with supply.

Houston

Heading into the second half of 2023, leasing activity and net absorption are slowing down as larger users turn cautious. Meanwhile, the market is poised to see an influx of supply, which will likely put additional pressure on the vacancy rate. With 30 million square feet underway, existing inventory levels are set to expand by 4.0% upon completion. At 23% pre-leased, the current trends of deliveries outpacing demand will continue.    

By submarket, the influence of construction activity is most pronounced in East-Far Southeast Houston, Sugar Land and Northwest Highway 6. On the east side of Houston, there are 23 properties underway representing more than 7 million square feet which currently stands at 17% pre-leased. Similarly, Sugar Land has 2.8 million square feet underway at only 12% pre-leased. Northwest Highway 6 has two million square feet underway on top of the two million square feet completed during the past two years. All told, expect vacancies will trend higher.   

Turning to rental rents, the average asking rental rate for available industrial space was $9.07/SF at the end of second-quarter 2023, up 8.4% year-over-year. Despite a rise in vacancy rates, we expect inflation and higher rents at newer properties will keep rent growth positive over the next year; albeit, at a moderating pace.

San Antonio

San Antonio’s industrial market is moderating as both demand and supply normalize from record highs. While vacancies remain low at 5.6%, they are up from the all-time low of 3.5% seen at year-end 2022. Despite the pullback, interest level remains high in San Antonio. South Central Texas continue to see strong demand drivers and the market is critical in the U.S.-Mexico supply chain. Automotive manufacturing, expansion/development of EV parts manufacturing supply chain, distribution and nearshoring themes all play into a bright outlook.

Currently, there are 50 properties representing 8.4 million square feet of properties under construction. Despite the slowdown in leasing velocity, San Antonio is primed to handle new supply coming onto the market. The largest pocket of activity is taking place in South San Antonio (2.7 million square feet) and in the Northeast (2.6 million square feet). Overall, ~ 1/3 of the construction pipeline is spoken for, the rest will take a few quarters to absorb.

Turning to rental rents, the average asking rental rate for available industrial space was $8.51/SF at the end of second-quarter 2023, up 14.8% year-over-year. While 2022 marked peak rent growth, we expect rents to continue to grow at a low-single-digit rate through 2025.

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RubiCrown Commercial Real Estate offers site selection advisory, economic incentives negotiation, tenant representation / brokerage services, and construction project management for users of office and industrial space in North America. RubiCrown’s core mission is to deliver competitive advantages, mitigate risks, and reduce costs related to built and occupied commercial real estate. Robbye Kirkpatrick may be reached by email at robbye@rubicrown.com for an in-depth analysis of your lease or real estate portfolio.