Texas Industrial Building Booms as Economy, Population Grow

By Laila Assanie and Michael Weiss

he boom in Texas commercial real supporting healthy and broad-based estate activity is plainly visible gains in the commercial real estate sec- T in the high-rises that create the tor—apartments, offices and industrial skylines of the state’s major metropoli- space. It was only during the most } tan areas and in the sprawling office recent energy bust, in 2015–16, that campuses dotting its thoroughfares. employment growth in the state fell be- ABSTRACT: A significant Another source of major activity is far low its long-term average growth rate, portion of Texas’ recent less conspicuous, though it has pow- primarily due to Houston's decline. ered another new wave of commercial Commercial construction and real construction activity has construction and economic activity. estate activity play a notable role in been industrial building, Demand for Texas industrial space, an area’s economic growth, buoying with Dallas–Fort Worth which includes warehouses, manu- output and employment growth. The leading the nation and facturing plants and research and state’s commercial real estate sector development facilities, has been robust will likely continue to expand this year, Houston among the top during the ongoing expansion cycle. albeit at a slower pace. six markets. Burgeoning Well over 235 million square feet of e-commerce, state space was built and absorbed from Industrial Construction Gains population gains and an 2010 to 2018 statewide, with Dallas– Consistent with Texas’ “bigger is Fort Worth ranking No. 1 in the country better” ethos, the thriving construction expanding export market in construction and in net absorption sector recorded $104.1 billion worth have contributed to the (net change in square footage of oc- of total contract values (residential, growth spurt that has cupied space) during the period and nonresidential and nonbuilding) last 1,2 included increases in Houston placing among the top six. year—an inflation-adjusted increase Texas’ underlying economic expan- of 5.9 percent from 2017. The 2018 transportation and logistics sion has been solid for the most part total was just shy of the previous peak employment. since the end of the Great Recession, in 2015, when $104.5 billion of new

CHART 1 DFW and Houston Major Players in the State's Industrial Market

ndustrial completions, millions of suare feet

l aso an ntonio ustin ort orth ouston allas

SOURCE: CBRE Econometric Advisors.

Southwest Economy • Federal Reserve Bank of Dallas • Second Quarter 2019 7 projects broke ground.3 Last year’s CHART increase was driven by a pickup in resi- DFW Industrial Space Completions Outpace Office dential (single-family and multifam- 2 ily) and nonbuilding (roads, bridges, ompletions, millions of suare feet power plants, etc.) construction. Texas has undergone a period of vast real estate development since 2010, partly because so many people have ndustrial been drawn to the area. The state’s ffice population reached 28.7 million in 2018, adding 3.5 million residents since 2010—placing it No.1 among U.S. states in numeric increase. Texas’ build- ing boom has boosted construction employment, which rose 3.9 percent in 2018. Industrial construction has expand- ed rapidly since 2010, making Texas the top-ranking state in the country in 4 terms of square footage. From 2010 to 2018, industrial space built in Texas’ major metros was four times the square SOURCE: CBRE Econometric Advisors. footage of new office space. Most industrial building occurs Widespread DFW Growth ternational Airport complement an within major metropolitan areas. Since DFW gained nearly 25 million extensive ground transport network. 2014, Texas’ five major metropolitan square feet of industrial space in 2018, Construction of a regional air hub for areas annually added more than 30 following an increase of 29 million Amazon Air—the first of its kind for the million square feet of industrial prop- square feet in 2017—the greatest ad- company and its logistics subsidiary— erty—principally warehouses—with dition of space in at least the past 30 is underway at Alliance Airport and the total exceeding 40 million square years, the period for which consult- scheduled to become operational this feet in both 2017 and 2018 (Chart 1). By ing firm CBRE Econometric Advisors year. 6 Meanwhile, total cargo (freight comparison, the largest amount added maintains data (Chart 2). Warehouse and mail) flowing through DFW Air- in any previous year (dating back to growth has been particularly impres- port rose for the fifth straight year in the late 1980s) was 45 million square sive. Since 2010, a total of 117.7 million 2018, up 2.7 percent.7 feet in 2008, most of it greenlighted just square feet have come on the market in This is no surprise given DFW’s posi- before the Great Recession that began DFW. The total is equivalent to almost tion as a major U.S. trade and distribu- in December 2007. 43 Empire State Buildings, the iconic tion center, thanks to its central loca- The expansion has been most visible 102-story New York City skyscraper, tion and infrastructure. Employment in in DFW and Houston, where occu- and is five-and-a-half times the square the transportation and logistics sector pancy rates for warehouse space have footage of office property added in makes up 4.3 percent of the metro hovered around 90 percent since 2013. DFW during the period. area’s total employment—a higher After a period of such rapid expan- The warehouse market boom has share than other major metros.8 More- sion, growth in industrial construction reached into southern and western over, healthy growth in the metroplex’s statewide is ebbing, albeit remain- portions of Dallas that investors previ- employment and population base has ing elevated by historical averages. ously largely overlooked. It has been fueled demand for consumer goods. Inflation-adjusted construction con- aided by an expansive transportation DFW has added 1.1 million residents tract values for warehouses dipped 3.8 and logistics sector, a byproduct of since 2010, ranking No. 1 among U.S. percent in 2018 relative to 2017 and e-commerce regional expansion that metros in numeric increase; Houston in the first four months of 2019 fell has contributed to the recent addition placed second. 13.2 percent compared with the same of freight, cargo-handling and fulfill- Foreign investors have taken par- period in 2018. ment operations for Amazon, FedEx ticular notice of the growth in DFW, Overall, nonresidential construction and UPS. In 2018, DFW had 10 of the ranking the metro No. 2 nationally contract values (including warehouse country’s largest warehouse deals.5 behind Los Angeles in terms of foreign construction) fell 11.6 percent last year Additionally, burgeoning air freight industrial acquisition activity in 2018, from 2017 totals in Texas while declin- operations at Fort Worth Alliance CBRE found.9 Buyers spent $14.4 bil- ing 2.3 percent nationally. Airport and Dallas–Fort Worth In- lion in the U.S., $849 million of that

8 Southwest Economy • Federal Reserve Bank of Dallas • Second Quarter 2019 in DFW, with investors from Canada, Overall, industrial construction and ing and a resulting 47 percent increase China and Singapore accounting for demand paused during the 2015–16 in the number of full truck containers most of the purchases from outside the energy bust (Chart 3). After adding crossing into the U.S. from Mexico at country. Foreign investment made up under 1 million square feet of manu- the El Paso and nearby Santa Teresa, 21 percent of total U.S. investment in facturing facilities in 2014–15, the New Mexico, ports of entry during the this sector last year. area regrouped from the slowdown, period, according to U.S. Transporta- gaining 4.7 million square feet in 2016. tion Department data.14 Trade, Logistics in Houston After another slow year with little new El Paso’s latest (2014–18) industrial E-commerce-related distribution, inventory in 2017—coinciding with completions are significantly below the last-mile fulfillment facilities and Hurricane Harvey devastation, though high recorded in the five-year period demand from big-box retailers have industrial properties were largely un- ended in 2000, when U.S.–Mexico similarly expanded throughout Hous- affected—a total of 1.1 million square transborder shipping was expanding ton. There were 63 warehouses under feet of manufacturing space entered rapidly in the wake of the 1994 imple- construction in Houston in late 2018, the market in 2018. mentation of the North American Free according to data from Avison Young, a Moreover, petrochemical plant Trade Agreement. commercial real estate firm.10 Houston growth in Texas has been vibrant dur- is also a gateway for commercial and ing the expansion and helped support Transportation, Warehousing Jobs industrial goods passing through the southeast Texas activity. One recently Employment in the transportation Port of Houston—ranking No. 6 in the completed large project is ExxonMo- and warehousing sector has mirrored nation in container shipping in 2018, bil’s ethane cracker in Baytown.13 the large space increases, particularly adding a significant global trade aspect in DFW. Employment in Texas expand- to area activity.11 Statewide Trade Expansion ed 2.1 percent annually in the five years The energy sector, rebounding from San Antonio recorded heightened ended in 2018, while payrolls in trans- the 2015–16 slump, has played an activity in the five years ended in portation and warehousing rose more increasing role, spurring growth of 2018. Industrial space grew by 10.8 rapidly, 4.3 percent, led by growth in warehouse facilities to ship and handle million square feet—about 87 percent warehousing and storage employment. energy-related cargo as well as for the for warehouses and the rest for manu- The Dallas, Plano and Irving metro- manufacture of energy equipment and facturing and research and develop- politan division added 39,025 jobs in goods, including chemicals. ment facilities. the transportation, warehousing and Houston recorded its second-largest A total of 1.4 million square feet utilities sector (a 7.9 percent annual five-year spurt of new industrial of industrial space entered El Paso’s increase) in 2014–18, while in Fort construction in the period ended last market during the five years ended in Worth–Arlington, sector payrolls grew year—nearly 57 million square feet 2018, the highest five-year increase by 20,482 jobs (5.5 percent) (Chart 4). completed, of which 48 million square since 2008. The gain coincided with The five-year gains in DFW eclipse feet was warehouse space.12 resurgent maquiladora manufactur- increases in any preceding five-year period at least as far back as the mid- CHART Industrial Demand in Houston Rebounds 1990s. Sector payrolls grew rapidly in Austin—an 8.2 percent annualized Following 2015–16 Energy Bust 3 rate—during the five-year period. Houston’s transportation, warehousing illions of suare feet and utilities employment expanded by et absorption 17,922 jobs in 2014–18, a 2.6 percent ompletions annualized increase. Industrial Vacancies Tight Demand for industrial space has taken off with growth in third-party logistics and in e-commerce, as firms seek warehouse space close to their customers. Nationwide, e-commerce and logistics companies accounted for 61 of the 100 largest warehouse deals - (leases and sales) by square footage in

- 2018, and DFW had the third-largest volume of transactions by square foot- SOURCE: CBRE Econometric Advisors. age, according to CBRE Research.15

Southwest Economy • Federal Reserve Bank of Dallas • Second Quarter 2019 9 Third-party logistics firms (trans- CHART Transportation, Warehousing and Utilities Employment portation/distribution) made up Expands at Rapid Clip in North and Central Texas nearly a third of industrial leasing 4 by square footage from first quarter ndex, anuary 2013 to first quarter 2019 in the Texas and Oklahoma region, which CBRE Research combines into a single unit. allas Accounting for much of the remainder ustin an ntonio of leasing were wholesale, 13 percent; ort orth materials manufacturing, 11 percent; Texas food and beverage, 10 percent; and e- l aso commerce, 9 percent. ouston Strong leasing demand has pushed overall industrial availability rates into the single digits in Austin, DFW, Hous- ton and San Antonio since early 2016.16 Continued Growth in 2019 The outlook for Texas’ industrial

markets is mostly positive for the year. The state’s broad economic expansion persists, and job growth is forecast at over 2 percent.17 Overall, investors expect to be more conservative in their commercial real NOTE: Data are through March 2019. SOURCES: Bureau of Labor Statistics; Texas Workforce Commission; seasonal and other adjustments by the estate acquisitions this year as high Federal Reserve Bank of Dallas. asset prices, financial market volatil- ity, and global and trade uncertainty damp expectations, according to 2 Net absorption is the net change in occupied space in industrial-real-estate. CBRE’s 2019 Americas Investor Inten- square feet during a given time period. It is measured 10 “63 Warehouses Under Construction in Houston; tions Survey.18 Still, industrial and by the square feet of completions less the change in More on the Way as Industrial Market Heats Up,” logistics remains the most favored available square footage. RealtyNewsReport.com, Oct. 29, 2018, property sector for investment. 3 Data are from Dodge Analytics. http://realtynewsreport.com/2018/10/29/63-warehouses- Industrial construction in the five 4 State totals are calculated by adding the square footage under-construction-in-houston-more-on-the-way-as- major metros is elevated, exceeding 47 of annual completions in 63 of the largest U.S. industrial industrial-market-heats-up/. million square feet as of first quarter markets at the metropolitan statistical area level. 11 Data are from Port of Houston, www.porthouston.com/ 2019.19 Given that vacancy rates are 5 “Dealmakers: E-Commerce & Logistics Firms about-us/statistics/. close to multiyear lows in most major Dominate Largest Warehouse Deals in 2018,” U.S. 12 Data from CBRE Econometric Advisors go back to the metros and Texas exports remain close MarketFlash, CBRE Research, Feb. 20, 2019, www. late 1980s. to all-time highs, the industrial market cbre.us/research-and-reports/dealmakers-e-commerce- 13 “ExxonMobil Starts Up New Ethane Cracker in appears to be on a solid footing. Un- logistics-firms-dominate-largest-warehouse-deals- Baytown, Texas,” ExxonMobil news release, July 26, certainty surrounding U.S. trade policy in-2018. 2018, https://news.exxonmobil.com/press-release/ is a wild card, but its impact on the 6 “Amazon Taps Fort Worth's Alliance Airport for exxonmobil-starts-new-ethane-cracker-baytown-texas. industrial sector thus far appears to be Regional Hub, Hundreds of Jobs,” by Bill Hethcock, 14 Data are from the U.S. Department of limited at least in the near term. Dallas Business Journal, Dec. 11, 2018, Transportation, Bureau of Transportation Statistics, www.bizjournals.com/dallas/news/2018/12/11/amazon- https://data.transportation.gov/Research-and-Statistics/ Assanie is a senior business economist, taps-fort-worths-alliance-airport-for.html. Border-Crossing-Entry-Data/keg4-3bc2. and Weiss is a senior writer/editor in 7 Data are from DFW International Airport’s website, 15 See note 5. the Research Department of the Federal www.dfwairport.com/stats/. 16 Industrial availability rate data are from CBRE Reserve Bank of Dallas. 8 “At the Heart of Texas: Cities' Industry Clusters Econometric Advisors. Drive Growth,” Special Report, Federal Reserve Bank of 17 Dallas Fed Texas Employment Forecast, see Notes Dallas, December 2018. www.dallasfed.org/research/forecast. 1 Data for Texas include Austin, Dallas, El Paso, Fort 9 “Foreign Investors Pump $14.4 Billion into U.S. 18 “Americas Investor Intentions Survey 2019,” CBRE, Worth, Houston and San Antonio. Data are as of first Industrial Real Estate,” U.S. MarketFlash, CBRE www.cbre.us/research-and-reports/Americas-Investor- quarter 2019 from CBRE Econometric Advisors, which Research, April 17, 2019, www.cbre.us/research-and- Intentions-Survey-2019. differs from the CBRE Research data series. reports/foreign-investors-pump-14-point-4-billion-into- 19 Data are from CBRE Research as of first quarter 2019.

10 Southwest Economy • Federal Reserve Bank of Dallas • Second Quarter 2019