Texas Industrial Markets Year in Review
January 6, 2022
Before touching on real estate, it is important to note the underlying strength of the Texas economy. From Elon Musk to Gordon Ramsay, corporate relations and employment growth continue to power the local economy. In 2021, there were 63 corporations that relocated their headquarters to Texas, according to YTexas. Furthermore, early evidence suggests the state created ~ 750,000 new jobs in 2021. While impressive, 2021 was an extension of longer-term trends already in-place. Now layer in the impact from the pandemic.
COVID-19 has disrupted many aspects of daily life, leading to behavior shifts from the way people live, shop, and work. As companies adjust to a new reality, they are forced to re-think the entire supply chain, including where goods are manufactured, stored, and transported to the consumer. Driven by unprecedented demand for industrial space, vacancies have moved lower and asking rents continue to march higher across the state of Texas.
In response to strong demand for industrial properties, the construction pipeline grew to 106.5 million square feet at the state level, compared to 71.7 million square feet a year ago. By market, Dallas-Fort Worth is positioned to add nearly 63 million square feet of new product driven by continued demand for eCommerce and third-party logistics. However, on a percentage basis, Austin and San Antonio are set to expand their existing base by 11.2% and 7.0%, respectively.
Fueled by a decade of ~ 3.0% population growth per annum and a strong economic backdrop, the Austin industrial market is extremely tight. Vacancy ended the year at 4.2%, down 290 basis points year-over-year as net absorption reached record highs. The market absorbed 9.3 million square feet during 2021, which is up from 2.8 million square feet in 2020. In response to strong demand, construction activity remains elevated ending the year with 11.6 million square feet underway. On a percentage basis, this figure represents an 11.2% expansion of existing inventory, which is one of the largest construction pipelines nationally. However, beneath the surface, these figures are a little misleading as two projects – Telsa’s 4.3-million-square-foot Gigafactory and Amazon’s 767,000-square-foot building in Hays County – account for nearly half of the construction pipeline.
Turning to rental rents, the average asking rental rate for available industrial space was $11.74/SF at the end of fourth-quarter 2021, up 6.1% from $11.07 at the end of fourth-quarter 2021. With asking rents largely flat from 2017 to 2019, rent growth began to accelerate in 2020 and 2021. We predict that rent growth will peak next year as future rent hikes begin to normalize in 2023 and beyond.
Dallas – Fort Worth
2021 marked another year in a multi-year cycle of above-average demand and supply within the DFW Industrial market. In fact, the 45.4 million square feet of net absorption that took place this year landed the metroplex in record territory and more than doubled the annual average seen during the previous 10 years. As a result, vacancy ended the year at 5.5%, which is down 200 basis points year-over-year.
Turning to rental rents, the average asking rental rate for available industrial space was $7.01/SF at the end of fourth-quarter 2021, up 0.9% from $6.95 at the end of fourth-quarter 2021. With asking rents increasing by double digits in 2018 and 2020, rent growth slowed significantly in 2021 as years of construction activity was digested by the market; however, we predict that rent growth will accelerate in 2022 with healthy gains in future years as pricing power remains with landlords.
Following a record year of new product coming online in 2020, the Houston industrial market rebounded nicely in 2021 with a record 28.1 million square feet of net absorption. This in-turn drove down the vacancy rate from 8.5% to 7.0% year-over-year. While elevated, we expect further tightening will continue in 2022 based on improving performance within the energy sector, record container volumes at the port, and steady population growth. Also helping the market: slowing construction activity. After delivering nearly 33 million square feet of new product in 2020, that figure dropped to 20 million in 2021 and will continue a downward march in 2022 based on the 16 million square feet currently in the construction pipeline.
Turning to rental rents, the average asking rental rate for available industrial space was $7.73/SF at the end of fourth-quarter 2021, up 2.5% year-over-year. We predict increased rent growth in 2022 and 2023 as market level fundamentals continue to improve.
The San Antonio industrial market recorded a net absorption of 4.8 million square feet in 2021, which follows a strong 2020 tally of 5.0 million square feet of net absorption. As a result, the vacancy rate which ended 2019 at 7.0% has continued a downward trend and stood at 5.0% at the end of fourth-quarter 2021, the lowest rate on record. While the market has recorded 18 leases that exceeded 100,000 square feet during the past 12 months, the vast majority of leasing activity has occurred with smaller companies. Nonetheless, the market remains healthy and the 9.7 million square feet of properties under construction is arguably needed.
Turning to rental rents, the average asking rental rate for available industrial space was $6.93/SF at the end of fourth-quarter 2021, up 8.8% year-over-year. We predict rent growth likely peaked this year, but rents should march higher through 2025, albeit at a slower pace.
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 email@example.com for an in-depth analysis of your lease or real estate portfolio.