Encroachment of woody plants into grasslands in arid and semiarid environments over the last several decades has been documented globally. This physiognomic shift has been attributed to modifications in grazing, fire and precipitation regimes as well as rising atmospheric CO2 concentrations. However, physiological mechanisms associated with variation in the establishment of woody plants in grassland communities, particularly in relation to shifts in precipitation regimes, remain poorly understood. Here, we identify physiological ‘windows of opportunity' for shrub establishment across contrasting sandy loam and clay loam soils under experimentally altered precipitation regimes and C4 grass cover. A five-year demographic study showed that mesquite (Prosopis velutina) seedling establishment was higher in sandy loam soil and with experimentally enhanced winter precipitation than in clay loam soil or with enhanced summer precipitation. Seedling mortality was apparently related to drought-induced xylem cavitation, which was differentially expressed across soil types and experimental precipitation regimes. However, grasses exerted a strong competitive control on mesquite establishment, as evidenced by lower rates of survivorship in experimental plots dominated by grasses compared to bare plots. Preliminary analyses of the isotope composition in the water of grasses and mesquite seedlings suggest an overlap in water sources that decreased with increasing mesquite age. Moreover, gas exchange analyses revealed that the time lag for water uptake in response to moisture inputs was less and the amplitude of response was greater for grasses compared to mesquite seedlings. A quantitative and mechanistic description of windows of opportunity for mesquite encroachment across environmental gradients is key to model past and future physiognomic shifts in grasslands under global change.