With a multi-year growth cycle in the rear-view mirror, demand for industrial space began to normalize nationally. However, because of the demand from some of the nation’s fastest- growing cities, 2022 marked another record year for Texas. In fact, net absorption exceeded 100 million square feet for the first time and 2022 marked the fourth consecutive year of accelerating demand. Driven by unprecedented demand for industrial space, vacancies have moved lower and asking rents continue to march higher across most of the state, despite record deliveries. However, moving into 2023, the story shifts from demand to supply. Construction activity remains elevated at the same time economic growth is slowing, which is creating a more subdued outlook. As a result, vacancies will tick up and rent growth will decelerate. Still, despite some headwinds, industrial fundamentals remain healthy and demand is forecasted to remain strong in Texas.

As of fourth quarter 2022, the construction pipeline stood at 153 million square feet at the state level, compared to 106 million square feet a year ago. By market, Dallas-Fort Worth is positioned to add 86 million square feet of new product with roughly 50 million square feet expected to come online in 2023. Similarly, Houston’s construction pipeline remains elevated with 34 million square feet underway, compared to the 10-year average of 13 million square feet. On a percentage basis, Austin leads the way, but we fully expect developers will let off the gas in 2024 because of higher construction costs and interest rates.

Austin

Fueled by one of the fastest-growing cities in the nation, Austin’s industrial market remains tight. Vacancy ended the year at 5.0% — up 80 basis points year-over-year — as record demand could not keep pace with new supply. The market absorbed 12 million square feet in 2022 as several large build-to-suits came online. Turning to supply, construction activity remains elevated with 134 properties underway, representing 15 million square feet. With only one- third of the construction pipeline pre-leased, completions will create a near-term overhang and could push the vacancy rate closer to 6.5% by year-end 2023. By submarket, the largest concentration of activity is taking place to the north in Georgetown and Round Rock. Combined these two submarkets account for ~ 60% of all activity and pre-leasing activity currently stands at around 50% mitigating some on the risk.

Turning to rental rents, the average asking rental rate for available industrial space was $12.03/SF at the end of fourth-quarter 2022, up 2.5% from $11.74 a year ago. With asking rents largely flat from 2017 to 2019, rent growth began to accelerate in 2020, but we forecast rent growth will dip below 2.0% from 2023 to 2025 before picking up again in 2026.

Dallas – Fort Worth

2022 marked another year in a decade long cycle of above-average demand and supply within the DFW Industrial market. The 37.7 million square feet of net absorption that took place this year was broad-based and only slightly below last year’s record high. Meanwhile, deliveries tallied nearly 41 million square feet pushing the vacancy rate up 10 bps year-over-year to 5.5%.

Moving forward, construction activity will begin to slow as developers contend with rising construction and borrowing costs; however, in-place construction is elevated with 86 million square feet of new product underway and only 18% pre-leased. The largest concentration of construction activity is taking place in South Dallas and NE Tarrant/Alliance presenting some near-term challenges to overall healthy fundamentals. Overall, we expect the vacancy rate in DFW will approach 7.0% in the coming year.

Turning to rental rents, the average asking rental rate for available industrial space was $8.22/SF at the end of fourth-quarter 2022, up a staggering 17% from $7.01 in fourth-quarter 2021. With asking rents increasing by double digits, we expect rent growth will trend lower over the next three years, but gains locally will outpace the national average.

Houston

Following a soft 2020, the Houston industrial market rebounded nicely with two consecutive years of strong performance. In 2022, the market recorded net absorption of 30 million square feet on top of the 28 million square feet absorbed in 2021. This in-turn drove down the vacancy rate from 7.0% to 5.5% year-over-year.

Driving performance was record container volumes at the port, steady population growth, a rebound in the energy sector and large leases signed by distribution and third-party logistics firms. The only negative in what was an incredible year, is a familiar one, rising construction activity. Currently, there are 216 properties that have broken ground representing 32 million square feet with only 14% pre-leased. As a result, we expect a slight uptick in vacancy in 2023 to 6.3%, a level below Austin and Dallas-Fort Worth.

Turning to rental rents, the average asking rental rate for available industrial space was $8.65/SF at the end of fourth-quarter 2022, up 11.9% year-over-year. In 2023, we expect rent growth in the low single-digit range with a further slowdown in 2024 following oversized gains in 2022.

San Antonio

Despite inflation, economic slowdown, and geopolitical risks, the San Antonio industrial market continues to perform. In fact, the market recorded record net absorption of 11.1 million square feet in 2022, marking the fourth consecutive year of accelerated demand. As a result, the vacancy rate which ended 2019 at 7.0% has continued a downward trend and stood at 3.5% at year-end 2022, the lowest rate on record.

Moving forward, nearshoring and the finalization of the U.S.-Mexico-Canada Agreement should add another demand driver. San Antonio remains in a handful of markets where more construction activity is needed. At year-end, 8 million square feet of properties is under construction with the largest pocket of activity taking place in the Northeast. Healthy fundamentals and outlook have San Antonio positioned to sport the lowest vacancy rate in 2023 for the major Texas markets.

Turning to rental rents, the average asking rental rate for available industrial space was $8.47/SF at the end of fourth-quarter 2022, up 14.5% year-over-year. While 2022 marked peak rent growth, we expect rents to continue to still grow at a mid-single-digit rate through 2025.

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.