Texas Real Estate Outlook: Four Major Markets Headed for Growth in 2018
Texas’ four major metropolises are expected to continue with stable real estate development and population growth this year, according to Avison Young’s 2018 annual report analyzing the office, retail, industrial and investment sectors in 67 markets in six countries on two continents.
According to Avison Young:
— Despite difficulties related to a slowly recovering energy industry and a historic amount of flooding by Hurricane Harvey, Houston manages to maintain a vibrant, diversified economy.
— Dallas dominates the industrial real estate in the U.S. with more than 21.5 million square feet under construction, of which 37% is preleased.
— Austin’s robust population, employment and economic growth continue to drive all commercial real estate market sectors.
— Employment in San Antonio continues to grow organically from existing businesses; the city’s real estate market ended 2017 on a positive note thanks to an affordable cost of living and a thriving millennial population.
In the latest population estimates by the U.S. Census Bureau, the Houston region was ranked as the second-fastest-growing metropolitan area in the U.S., notes Rand Stephens, Principal and Managing Director in Avison Young’s Houston office. “The Houston economy has managed to grow despite a stagnating energy industry, placing the city in a favorable position once oil prices finally turn around,” he continues. “Economic conditions in Houston are expected to continue recovering at a steady pace throughout 2018.”
While most other product types recovered throughout 2017, Houston’s office market continues to be weighed down by a glut of available inventory, with tenants vacating sublease space just as large construction projects were delivered to the market,
“However, Houston’s brightening economic outlook is giving companies a renewed sense of optimism, leading to an uptick in leasing activity and an increasingly diverse mix of tenants in the market,” Stephens continues. “Conditions are also improving on the supply side. The current construction pipeline is one of the lowest recorded in the last five years and tenants are largely finished shedding excess space on the sublease market.”
The industrial market was Houston’s best-performing product type last year. Demand for big-box distribution and warehouse product spiked in the past year due to expansion in the consumer goods sector and rapid population growth, establishing Houston as a formidable distribution hub. Says Stephens: “Vacancy is projected to remain stable through 2018 with new supply balancing out demand.”
On the retail side, the Houston market continues to catch up with demand driven by the city’s population boom. “Absorption stagnated in 2017 due to high occupancy and a limited amount of space for retailers to expand into – a trend that is projected to continue in 2018,” he adds.
After explosive growth in 2016, the DFW metro settled into a strong, yet sustainable, pace last year – a trend that is expected to continue through 2018, reports Greg Langston, Avison Young’s Principal and Managing Director in Dallas. “Thanks to its business-friendly environment, the low cost of living and the innovative business climate, employment gains have been robust and are accelerating and broad-based within and across the financial services, technology and healthcare sectors,” Langston adds.
Impressive employment gains and corporate relocations have propelled the office market expansion throughout the past three years. Major corporate projects that were in the works for years delivered in 2017 including the Toyota, Liberty Mutual and JP Morgan Chase campuses totaling 4.5 million square feet, Langston adds. “These large build-to-suit deliveries resulted in 2017 being one of the best years on record in terms of absorption. Large corporations continue to announce expansion plans in the Dallas market, keeping build-to-suit construction activity high in 2018.”
Dallas’ ongoing population boom is driving demand from industrial users, particularly e-commerce suppliers as online shopping grows in popularity. “The city’s vibrant economy and centralized location make Dallas an ideal hub for warehouse and distribution properties,” Langston says. “A historic amount of construction activity during the past three years has been met with record-breaking leasing activity and absorption, resulting in a consistently tight industrial market. Demand in the market continues to push rates higher. The DFW industrial market is projected to maintain this high level of activity through 2018.”
The availability of retail space tightened further last year in Big D. “The substantial growth in Dallas is supporting high-paying jobs, leading to increased consumer spending and the need for additional retail locations,” Langston says. “Average asking rates climbed throughout 2017 and are expected to continue increasing through 2018.”
Robust population, employment and economic growth are fueling the real estate market in the state capital. “Projected sustained job growth and demand for all product types through 2018 translate to an optimistic outlook for this historically healthy market,” says Corey Martin, Principal and Managing Director of Avison Young’s Austin office. “Developers and owners should take Austin’s distinctly tech-driven economy, large millennial workforce, and evolving workplace trends into consideration when formulating their strategies for 2018.”
Office-using employment growth is expected to carry through 2018 — preserving stability in Austin’s office market fundamentals, albeit at a slightly softer pace. “Landlords will likely enjoy another year in their favor even as an additional 2 million square feet of office product delivers in 2018 and stalls vacancy compression,” Martin continues. “Class A space will remain in high demand in 2018 though tenants may see some relief from landlords offering rental-rate abatement to offset climbing operating costs.”
Austin’s industrial development pipeline is approaching 1.5 million square feet. While historically low vacancy rates have prompted speculative development, the average occupancy rate for projects delivered in 2017 was only 48%. “Asking rates rose with demand in 2017,” says Martin. “However, additional space delivering to the market in 2018 may propel landlords to increase concessions in an effort to retain tenants.”
Anchored by a strongly performing economy, Austin’s retail market remains resilient. The city’s retail vacancy rate remains one of the lowest in the country at 3.5%. “Retailers, investors and developers should have a bullish outlook on the Austin retail market in 2018 as income and residential growth propel the retail sector forward,” says Martin.
The Alamo City’s affordability is attracting residents and new companies to the area resulting in increased real estate activity, according to Marshall Davidson, Principal and Managing Director for Avison Young in San Antonio. “Population growth fuels demand for new commercial properties,” Davidson points out. “The IH-35 corridor between Austin and San Antonio continues to record substantial growth and urbanization. Active job growth in the region has been driven by employment gains in health care, bioscience, aerospace and information technology.”
In addition, the San Antonio office market has grown considerably in recent years and is now able to accommodate large construction projects with tenants willing to pay higher rates for new product. Nearly 1.2 million square feet is under construction – the largest construction pipeline recorded in the past decade. “The market is digesting what is being built. This situation led to a relatively stable vacancy rate from the previous year even as new space was delivered to the market,” says Davidson. “Construction began on the 462,000 square foot Frost Tower in 2017. It is the first new local office high-rise to be built in 30 years. With 68% of the building already preleased, it is revitalizing San Antonio’s urban core and has kicked off a wave of new development that is fostering a live-work- play atmosphere.”
Davidson adds that USAA, San Antonio’s second largest company has purchased two of downtown’s largest class A multitenant office buildings with the intention to make them single tenant buildings for the company’s expansion. “Inasmuch as this represents nearly half of the class A supply downtown, it has put tremendous pressure on the remaining buildings,” he explains. “Large blocks of space are either not available or in short supply and full floor credit tenants are circling a small pool of limited options. The net winners will be those bold enough to build modern, efficient office space where none exists today.”
The city has made significant investments in infrastructure along the Austin-San Antonio IH 35 corridor, positioning the city to emerge as a major distribution hub. “Most of San Antonio’s industrial demand is located along this corridor,” says Davidson. “The industrial market remained tight throughout 2017– a trend that is expected to continue in 2018.”
San Antonio’s population gains are boosting demand for retail – particularly in the downtown area where a significant number of new infill, multifamily developments have been delivered. The result: a live-work-play atmosphere that is growing in popularity. “Restaurant and retail demand, particularly in areas with robust foot traffic, are expected to remain elevated in 2018,” he adds.
Jan. 23, 2018 Realty News Report Copyright 2018