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Growth of Industrial Markets in Austin, Dallas, Houston, and San Antonio: Comparisons of Flex, Manufacturing, and Warehouse/Distribution Space

November 2016 I Vol. 2, ISSUE 12 I Download PDF

Executive Summary
In 2015, Texas had four of the top 10 fastest growing metropolitan statistical areas in the United States, including Dallas/Fort Worth and Houston with large population sizes of 7.0 and 6.6 million people, respectively, and Austin and San Antonio with smaller populations of 2.0 and 2.4 million people. Here, we examine how growth in the supply of industrial products has changed across Texas in light of its fast growing cities. We measure supply by stock inventory, the square feet of building space such as flex, manufacturing, and warehouse/distribution products.

Figures 1A and 1B show population size and stock inventory for all industrial products for each of Houston, Austin, Dallas/Fort Worth, and San Antonio from 2000-2016. Both charts are indexed to values of 2006 to facilitate comparisons through time and among cities. For example, when indexed to 2006, Austin’s population of two million people is 132, which equates with a 32% increase in population size since 2006 (Figure 2A). This is 10% to 13% greater than the other three cities whose population increases have been 19% to 22% since 2006.

Across these four cities of Texas, stock inventory of industrial space has increased 14-17% since 2006 (Figure 1B). While this growth rate in overall industrial space was relatively similar among cities for all industrial products combined, there were some key differences in the growth of manufacturing, warehouse/distribution, or flex spaces among the four Texas cities (see Figures 4 – 6). First, although the stock inventory of manufacturing space is greatest for Dallas and Houston, the growth rates in stock inventory of manufacturing buildings have been the greatest for Austin and San Antonio. Second, growth rates of warehouse/distribution buildings differ by only 5% among the four cities, ranging from 17% to 23% growth since 2006. Third, flex space has differed the most among the four cities, having grown 10% since 2006 in Austin and Houston, 5% in San Antonio, and experiencing little to no growth in Dallas. In summary, industrial real estate increases with population growth. Overall commercial real estate is strengthening in Texas, in part because of this consistent population growth in these four markets, despite some economic woes in recent times with oil commodity prices.

Motivation
Supply and demand are perhaps the most fundamental concepts in economics that shape the dynamics of the commercial real estate industry. Demand is most commonly estimated by net absorption, but it is also measured by leasing activity. Supply is measured by stock inventory, construction, new deliveries, and building permits. Stock inventory estimates realized supply, that is how much of a particular product a market offers. The other measures of supply are estimates of new supply anticipated to be added to stock inventory in the future. Note, vacancy—which is often used as a surrogate for supply—is actually a function of both supply and demand. Here, we examine how stock inventory of industrial products vary among Houston, Austin, Dallas/Fort Worth, and San Antonio, given that these four Texas cities were among the top 10 fastest growing cities recently ranked by U.S. Bureau of Census. More specifically, does stock inventory of various industrial products vary with the population size of the market within which they occur? With vacancy as an indicator variable, we examine market cycles of Austin’s Class A, Class B, and Class C buildings. We evaluate the extent to which Austin’s office market has predictable cycles, and determine the timing and duration of the cycles. In what phase is Austin’s market cycle currently, and where is it going? Forecasting how vacancies are likely to change in coming quarters and years can help tenants, landlords, and investors navigate the office market.

Population Growth of Texas Cities
Figure 2A shows the population sizes for the metropolitan statistical areas of Houston, Austin, Dallas/Fort Worth, and San Antonio, each of which ranked in the top 10 fastest-growing U.S. cities in 2015 (the latest census of the U.S. Bureau of Census). Dallas/Fort Worth and Houston have large population sizes of 7.0 and 6.6 million people, while San Antonio and Austin have smaller populations of about 2.4 and 2.0 million people. Figure 2B shows each city’s population size indexed to 100 for the year of 2006. This allows changes in population size to be interpreted as percent changes since 2006. For example, Dallas/Fort Worth had a population of 7.1 million people (Figure 2A), that is 119.5 indexed to 2006. Dallas/Fort Worth has had a 19.5% increase in population size since 2006 (Figure 2B), which is the slowest among the four cities. Overall, all four cities have strong growth trends over the past 10 years, with a particularly strong leap forward by Austin. Austin has grown 10% to 13% greater than the other three cities, each of which have grown by 19% to 22% since 2006.

Growth in Overall Stock Inventory Among the Texas Cities
Stock inventory of industrial space has increased substantially among the four Texas cities (Figure 3A). Dallas/Fort Worth and Houston have large stock inventories of 844 and 573 million sq. ft., respectively, while Austin and San Antonio have smaller stocks of 97 and 122 million sq. ft. As with population size (Figure 2), comparing growth and changes in the stock inventory among the markets is made easier by indexing the numbers. Figure 3B shows each city’s stock inventory indexed to a value of 100 for the year of 2006. In this way, changes in inventory over the past 10 years and among the four fastest-growing cities can be interpreted as percentages. Stock inventory of industrial space has increased 14% to 17% since 2006 across these four cities of Texas (Figure 1B). Austin did experience some higher growth from 2009-2013, but by the middle of 2015 all four markets were again on the same trajectory of growth.

Differences in Growth of Stock
While the overall growth rate of industrial space among these cities was relatively similar over the past 10 years for all industrial products combined, there were some key differences in the growth of manufacturing (Figure 4), warehouse/distribution (Figure 5), and flex (Figure 6) spaces among Austin, Dallas/Fort Worth, Houston, and San Antonio. The stock inventory of manufacturing space is greatest for Dallas/Fort Worth and Houston, but the growth rate in stock inventory of manufacturing buildings has been greater for Austin and San Antonio (about 10%) versus Dallas/Fort Worth and Houston (about 4-5%) (Figure 4). While there are some minor differences in the growth rates of warehouse/distribution buildings among the four cities, they have all grown within a tight 5% difference among one another, ranging from 17% to 23% growth since 2006 (Figure 5). Of the various industrial products, flex space has differed the most among the four cities. Flex has grown about 10% since 2006 in both Austin and Houston and a modest 5% in San Antonio, but flex has had little to no growth in Dallas/Fort Worth.

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