Q1 2024 Commercial Real Estate Report: Texas
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While Texas continues to be one of the nation's top business performers in 2024, it wasn't immune to economic indicators such as higher interest rates affecting the CRE property sector.
First, a recap of the nation's commercial real estate (CRE) performance.
The office sector continues to suffer from the post-COVID remote and hybrid work environment. While multi-family inventory is being absorbed, some areas remain overbuilt.
Retail CRE continued to forge new paths, with an evolving emphasis on combined e-commerce and in-person shopping experiences. This helped keep retail vacancy rates flat at around 10%.
Demand weakened within some industrial sectors as inventory expansion to combat long-standing supply chain constraints leveled out.
Did major metro areas in Texas manage to outperform national averages during Q1 2024?
We'll examine some of the state's largest CRE markets in three major cities: Austin, Dallas, and Houston.
Industrial CRE Performance in Texas
Austin's total inventory grew to 88.9 million square feet, with new supply adding up to 2.3 million square feet.
Net absorption was positive, surging to 3.0 million square feet even with ongoing spec projects under construction.
Austin's asking rent numbers came in at $14.30 per square foot, up from $13.51 per square foot in Q4 2023.
Dallas fared less well than Austin, with a vacancy rate for industrial CRE just under 10%. This is one of the highest rates within major U.S. metros.
This was the result of 2023's completed properties, combined with Walmart and Amazon departing the area. This added almost 85 million square feet of space.
Dallas' biggest industrial lease was signed by organization gurus The Container Store for just over 1,100 square feet.
Asking rates rose slightly from Q4 2023's $8.00, coming at $8.18.
Houston's reputation for resilience remained evident, with vacancy rates rising slightly to 7.4% but still at a much lower percentage than many other metros.
Net absorption (move-ins minus move-outs) reached 2.5 million square feet, a 4.5% increase from Q4 2023 but 44% down from Q1 2023.
Despite the decrease, net absorption in Houston's industrial market has remained positive for 58 consecutive quarters.
Asking rates rose by 7.4% year over year for a new record-high NNN of $0.79 per square foot.
Office CRE Performance in Texas
Dallas experienced a slight rebound during Q1 2024 as 150,000 new residents arrived in 2023. This put the city in first place for residential growth.
At over 20%, Big D's vacancy rate ranks among the highest in the nation.
Construction continues in high-quality markets like Uptown, Turtle Creek, Frisco, and the upper North Dallas Tollway, with over 8 million square feet in progress.
Asking rents for Class A properties reached $35.17 per square foot, with overall asking rates at $31.03 per square foot.
Austin's office CRE welcomed around 500,000 square feet in new supply, more than twice the number for Q4 2023.
However, Austin shared Dallas' vacancy pain, coming in slightly higher at 22.5%.
IBM, Cisco, and Dun & Bradstreet were some of Austin's most notable new and renewing tenants.
Net absorption was just under 288,000 square feet, a decrease from Q4 2023 but an improvement from the first half of 2023.
Asking rents slid slightly from late 2023, coming in at $41.52 per square foot.
Houston's market for office leasing shares similar problems to other major metros.
Class A office space continues to attract most new activity as more businesses evaluate their return-to-work policies based on employee preferences.
Net absorption slid to a negative 616,399 square feet as firms leased smaller office spaces.
Office vacancies were higher than for Austin and Dallas, dropping to almost 27% during Q1 2024.
Retail CRE Performance in Texas
Houston shoppers kept vacancy rates low, as the vacancy rate declined to 5.2% during Q1 2024.
Leasing activity for retail space was just under 1.9 MSF, similar to Q4 2023.
Although net absorption has stayed positive since 2020, the current quarter represents just 2.2% of the over 445,000 square feet of new supply.
The current asking rate of $20.53 reflects a 5.3% increase from Q1 2023.
Austin's retail market has been the hottest in the state for the past few years, and this trend is continuing into 2024.
Occupancy reached 96.8% during Q4 2023, fueled by its fast-growing population of around 2.5 million residents.
Asking rates for Class A, small tenant properties are posting from $35 to $60 per square foot…sometimes more for key locations.
Dallas-Fort Worth's retail results for Q1 2024 comprised its strongest CRE category.
Space is almost as hot as Austin's, with occupancy rates exceeding 95%. This is one of the highest retail occupancy numbers in over 30 years.
Community centers with grocery anchors have become DFW's largest, with 488 centers offering 74 million square feet.
Asking rates averaged $36 per square foot for Class A properties, with the Park Cities/Oak Lawn area collecting up to $64.
Multi-Family CRE Performance in Texas
While Houston's demand for all classes of units softened, Class A units reported the smallest 9.0% decrease, with one-bedroom rents averaging $1,736.
Class B apartments were the most popular. 291,420 units were rented at a slightly higher price of $1,254.
Overall net absorption dropped to 1,322 units during the first quarter. This was a 54.2% drop from Q4 2023.
New supplies of multi-family units totaled 3,069 units, a 49.7% drop from the prior quarter and down 63.3% year-over-year.
Austin's multi-family market saw 19,328 new units completed by Q1 2024. This boosted inventory by just under 7%.
As residential property prices continued to rise, more would-be homeowners decided to continue renting.
However, rent pricing fell significantly, ending Q1 with a 6.7% decrease, the steepest since 2009.
Class C properties, together with Northwest and South Austin, saw the biggest drops in unit pricing.
Dallas-Fort Worth led the nation in apartment completions over the past 12 months, with suburban growth fueling the competition of just over 33,000 units in early 2024.
68,418 units were under construction in the region, and 45,112 of these units will be delivered within the next 12 months.
Class A properties maintained the highest occupancy rates among all classes at 93.3%.
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