Industrial is far and away the hottest sector in commercial real estate right now and the hottest industrial markets are scattered throughout Texas, each one creating a unique draw for investors and developers.
The largest city in the Lone Star State also boasts the most absorption of industrial space so far in 2020: just more than 6.4 million square feet. According to CBRE research, nearly 3.9 million of that got leased up just in Q2. In that same period, though, about 8 million square feet came on the market, which boosted vacancy rates to 6.9 percent. About 18 million square feet of new industrial is under construction in the Houston market with the southwest (8.5M SF) and northwest (4.8M SF) sectors bringing in the most space. “Houston is very competitive,” said Alfredo Gutierrez, president of industrial-focused investment firm SparrowHawk Real Estate Strategists. “Because of the setback in oil prices, some investors are perceiving a pullback in real estate by some of the energy companies. That provides a window of opportunity to invest in industrial real estate in Houston.” He predicts this window will close in late 2021 as the energy sector rebounds, e-commerce increases and the benefits of trade with Mexico expand in Houston.
When it comes to new construction, it’s hard to beat the numbers coming out of the Dallas-Fort Worth area. CBRE reports that in Q2, more than 23 million square feet was underway. Thing is, that space is getting eaten up as soon as it hits the market. For example, DFW had about 3.4 million square feet in completions and 2 million square feet of net absorption this spring, marking 39 consecutive quarters of positive net absorption. “I think Dallas is the strongest market in the United States right now,” Gutierrez said. “Dallas is just screaming hot.” Two of the three largest leases signed in Q3 are distribution-focused companies. FedEx scooped up about 750,000 square feet of available space, opening a new distribution center in South Dallas, while packaging and fulfillment firm AmeriPac expanded to a new 400,000 square-foot facility near DFW Airport.
Experts agree El Paso is the market to watch as near-shoring adds production to Mexico and manufacturers are looking for convenient locations to store their goods before they’re shipped across the U.S. That’s why vacancy rates are some of the lowest in the country. Right now, only 2.9 percent of industrial space (a record low) is available in El Paso, boosting the asking rate to a record high: $5.38 PSF. To answer demand, CBRE reports 3.4 million square feet of space is currently under construction, including a new three-story industrial build-to-suit project. Another project is a 370,000-square-foot warehouse/distribution complex from Hunt Southwest Real Estate Development Co. Hunt Southwest president, Preston Herold, told the El Paso Times the company picked the border town because of its low vacancy rates, calling them “market fundamentals you want to see as an investor and developer (in real estate).”
While they’re not making the headlines of the other Texas markets, Austin and San Antonio are holding their own in the industrial sector. CBRE reports that strong tenant demand for distribution space contributed to Austin’s 25th consecutive quarter of net absorption. Vacancy in the capital city is down to 9.7 percent as Q3 saw no new projects delivered. The opposite is the case in San Antonio, where more than 800,000 new square feet came to market in Q3. As a result, vacancy bumped up to 14.2 percent. And more projects are on the way. Per CBRE, a whopping 1.8 million square feet are under construction.