SOUTHWEST U.S. INDUSTRIAL MARKET REPORT – Q1 2025

The Southwest industrial market continues to transition from an aggressive expansion phase to a more balanced environment. Leasing activity in Q1 was healthy but selective, with occupiers prioritizing well-located, functional space and rightsized footprints over speculative expansion. Modern Class A bulk product in major corridors such as Dallas–Fort Worth, Houston, Phoenix, and San Antonio is competing more actively on concessions, while smaller-bay and infill product remains in favor.

Developers have throttled back new starts in response to higher interest costs and a fuller pipeline of recently delivered space. Projects underway are increasingly build-to-suit or grounded in long-term commitments from creditworthy tenants. As the construction pipeline tapers in 2025 and 2026, the region is positioned to work through current vacancies and return to a healthier equilibrium of supply and demand.

From a capital-markets standpoint, investors remain focused on core logistics locations and mission-critical industrial assets. Lenders are open for business but are underwriting with greater discipline, emphasizing sponsor experience, realistic rent assumptions, and thoughtful rollover and capex planning.

Structural demand drivers across the Southwest include population growth, strong in-migration from higher-cost coastal markets, expanding consumer bases, and the region’s role as a national logistics and manufacturing hub. Interstates, rail corridors, and major inland ports connect the Southwest to both coastal gateways and Mexican trade flows, supporting regional distribution and cross-border supply chains.

E-commerce and retail fulfillment continue to anchor large-bay demand, complemented by third-party logistics firms servicing diversified customer bases. Manufacturing-related uses—particularly in automotive, aerospace, building materials, and advanced production—have added a layer of structurally sticky demand in Texas and Arizona. Smaller infill facilities near population centers support last-mile delivery, service contractors, and light assembly.

New construction remains concentrated in master-planned industrial parks and transportation-served corridors. Speculative development is now more targeted, with a focus on modern clear heights, ample parking, excess trailer storage, and flexible divisibility that can accommodate a broader range of tenants as the cycle evolves.

Dallas–Fort Worth – diversified demand and bulk logistics

Dallas–Fort Worth remains the largest Southwest industrial hub by inventory and leasing volume. Q1 activity was led by third-party logistics providers, retailers, and manufacturers consolidating or optimizing regional distribution footprints. Large-bay speculative projects in outlying corridors are working through lease-up, while infill and mid-bay buildings closer to labor and rooftops remain competitive with comparatively lower vacancy.

Investors continue to focus on modern cross-dock and rear-load product with functional specs, while lenders scrutinize business plans for new or partially leased projects to ensure sufficient capital reserves and realistic lease-up timelines.

Houston – port, petrochemical, and energy-linked logistics

Houston’s industrial market is benefiting from steady port activity, petrochemical-related logistics, and expanding distribution tied to population growth. Q1 leasing was concentrated in modern warehouse and distribution product along major transportation corridors, with users seeking to align facilities with both port and inland distribution networks.

While new supply has pushed vacancy higher in select submarkets, well-located assets serving the port, petrochemical complex, and medical/technical clusters remain in demand. Financing is available for stabilized properties and well-capitalized repositioning plans.

Austin & San Antonio – growth, tech, and regional distribution

Austin continues to attract advanced manufacturing, technology, and supplier ecosystems, supporting demand for both industrial and flex product. San Antonio’s industrial base is anchored by logistics, military-related activity, and regional distribution, with key corridors along I-35 and I-10 seeing consistent leasing from consumer products, building materials, and food and beverage users.

Development in these metros is more measured, with a higher share of build-to-suit or heavily pre-leased projects. Owners of existing vintage assets are pursuing strategic upgrades to remain competitive against newer product while preserving established locations and tenant relationships.

Phoenix – regional distribution and manufacturing growth

Phoenix has emerged as a key inland port and regional distribution hub, benefiting from its proximity to West Coast ports, access to major interstate corridors, and growing manufacturing investments. Q1 leasing was driven by logistics operators, retailers, and manufacturers seeking modern space with strong transportation access and competitive occupancy costs relative to coastal markets.

Speculative construction has been meaningful over the last several years, and Q1 reflected a more competitive leasing environment in select big-box corridors. Infill and mid-bay assets closer to workforce concentrations and consumer rooftops remain relatively tight and continue to command premium rents.

Tucson – manufacturing, defense, and regional logistics

Tucson’s industrial market is anchored by aerospace, defense, logistics, and university-related demand. Limited new construction relative to demand has helped maintain stable fundamentals, particularly for functional space in well-located submarkets with access to interstate and rail infrastructure.

Albuquerque – regional distribution and service hub

Albuquerque acts as a regional distribution hub for New Mexico and surrounding states, with Q1 demand supported by government, healthcare, utilities, and regional logistics users. Limited new industrial construction in recent years has generally favored existing well-located assets, especially those with functional layouts and clear access to major highways.

Border and gateway markets – El Paso and cross-border logistics

El Paso and other border-oriented markets continue to benefit from cross-border trade, nearshoring of production, and growing interest in more resilient supply chains. Q1 leasing was influenced by manufacturing suppliers, logistics providers, and companies redesigning network footprints to balance cost, resiliency, and delivery times.

• Inland port and rail-served nodes: Markets with rail connectivity and access to intermodal facilities are attracting large-scale logistics and manufacturing investments.
• Sub-100,000-square-foot infill product: Tight land availability and growing populations support long-term demand for small-bay and service-oriented facilities.
• Advanced manufacturing corridors: Clusters tied to semiconductors, automotive, aerospace, and energy transition are drawing capital for both plant and supplier-oriented logistics space.

Capital markets for Southwest industrial assets were selective but active in Q1 2025. Buyers remain most engaged for modern, well-located facilities with durable tenant demand and reasonable lease terms. Assets with shorter lease duration or higher vacancy are trading, but at pricing that reflects the time and capital required to stabilize income.

Debt capital is available from banks, life companies, debt funds, and CMBS-style lenders, with structures calibrated to property condition, lease profile, and sponsor strength. Key themes include:

• Conventional term loans: For stabilized assets with strong tenancy, modest leverage, and predictable cash flow.
• Bridge and transitional loans: For properties requiring lease-up, reconfiguration, or recapitalization ahead of a permanent takeout.
• SBA 7(a) and 504 executions: For owner-users purchasing industrial facilities, expanding operations, or consolidating leased locations into owned real estate.
• Structured capital stacks: In select cases, mezzanine or preferred equity is used to right-size leverage or fund strategic capex programs.

Sponsors who present transparent operating histories, realistic lease-up assumptions, and clearly defined renovation and improvement plans are best positioned to secure competitive pricing and terms.

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Operating costs and labor availability

Rising insurance, property taxes, utilities, and payroll continue to pressure margins in many Southwest markets. Operators are responding with more disciplined budgeting, technology-enabled building management, and operational efficiencies designed to protect net operating income while maintaining service levels.

Re-tenanting and capital improvement strategies

Owners of partially leased or newly delivered buildings have an opportunity to reposition assets through targeted capital projects, strategic leasing, and re-branding. Upgrading truck courts, yard configurations, lighting, clear heights, and office build-outs can enhance competitiveness, particularly against older commodity assets.

Distress, workouts, and opportunistic acquisitions

While broad-based distress has not materialized, pockets of stress exist where elevated interest costs, slower lease-up, or near-term maturities intersect. In these situations, owners are exploring loan modifications, extensions, recapitalizations, and structured sales. Well-capitalized investors with patient capital may find selective opportunities to acquire quality assets at more attractive entry yields than were available at the recent market peak.

Sponsor sophistication as a differentiator

Across the Southwest, lenders and capital partners are prioritizing sponsors who demonstrate clear business plans, disciplined underwriting, and thoughtful risk management. Those who present detailed capital expenditure schedules, realistic rent and rollover assumptions, and well-defined exit strategies are more likely to obtain preferred terms and move quickly when opportunities arise.

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The Q2 2025 outlook for Southwest industrial was anchored on Tier 2 demand strength — particularly Houston and Phoenix — alongside a substantial Dallas-Fort Worth construction pipeline working through digestion, and steady manufacturing investment supported by federal CHIPS and IIJA programs.

Demand-Side Indicators

Southwest leasing activity strengthened entering Q2 2025, with Houston recording 62 consecutive quarters of positive absorption and leasing velocity up 26% quarter-over-quarter. Manufacturing demand surged across Texas as tariff and onshoring narratives drove reshoring commitments. Phoenix and Las Vegas continued to attract logistics and data-center-adjacent users, while Austin worked through its prior speculative cycle with elevated vacancy.

Supply-Side Indicators

Dallas-Fort Worth led the nation in construction pipeline size entering Q2 2025, with completions accelerating sharply. Phoenix construction activity moderated from 2021–2022 peaks but remained the third-largest pipeline nationally. Houston's pipeline expanded as entitled supply remained constrained relative to demand. Speculative deliveries across the region were anticipated to weigh on vacancy through year-end.

Capital Markets Indicators

Capital markets execution for Southwest industrial assets remained robust in Q2 2025, with Tier 2 markets including Houston, Phoenix, and Miami capturing increased investor attention. LifeCo and CMBS lenders maintained appetite for stabilized logistics and manufacturing product. Bridge capital was the primary solution for lease-up and value-add assets, while SBA programs supported a meaningful share of owner-user acquisitions in Texas, Arizona, and Nevada.

Trade Policy and Risks to the Outlook

Tariff and trade-policy uncertainty was a defining factor in the Southwest outlook for Q2 2025, with Texas border markets particularly sensitive to USMCA enforcement and Mexico nearshoring dynamics. Phoenix's exposure to semiconductor and advanced-manufacturing reshoring positioned it favorably under federal CHIPS programs. Border-adjacent Laredo and El Paso submarkets continued to see strong cross-border distribution demand.

Capital Strategy Implications

Southwest sponsors entering Q2 2025 faced a bifurcated capital strategy environment. Stabilized assets in Houston, Phoenix, and DFW core submarkets remained candidates for LifeCo and CMBS permanent debt. Lease-up and transitional assets, particularly in submarkets with elevated speculative vacancy, were better matched to bridge capital with extended runway. Owner-users acquiring manufacturing or distribution facilities continued to find SBA 7(a) and 504 financing accretive across the region.