Houston Industrial vacancy rate tightens to 6.5%, lowest level in past 9 quarters.
EXECUTIVE SUMMARY
HOUSTON INDUSTRIAL CONTINUES POSITIVE MOMENTUM
Q1 2022 marks the fourth consecutive quarter that demand for industrial space, represented by net absorption (5.6 million sq. ft.), outpaced supply (2.8 million sq. ft.) in the Houston metro—a streak not seen since Q4 2017. Leasing was also once again strong, with Houston recording its sixth straight quarter of activity of more than 9 million sq. ft. For context, going back five years (2017-2022), the average quarterly tally of leasing activity is 9.1 million sq. ft. In the prior five-year period (2011-2016), the average was 6.9 million— a 33% increase. With 2.8 million sq. ft. delivered in Q1 2022, 18 million sq. ft. under construction, and another 13 million sq. ft. proposed through 2022, the demand for industrial real estate may continue to outpace supply.
OIL IS AT ITS HIGHEST PRICE PER BARREL SINCE 2014
WTI crude futures rose more than 1% to above $97 per barrel in volatile trading on April 7th. Baker Hughes data shows the number of active U.S. rigs drilling for oil, an early indicator of future output, was up to 533 in the week ended April 1st, the highest since April 2020. Higher oil prices mean higher rig counts, which means higher production, and this time around, further risk and volatility are likely to persist in energy markets for some time. With robust demand and development activity, the Houston Industrial market should continue to show positive momentum and continued growth in 2022.
MARKET OVERVIEW
NET ABSORPTION UP OVER 250% COMPARED TO THIS TIME LAST YEAR
The industrial market’s momentum continued into 2022, with the first quarter marking 51 straight quarters—equal to over 12 years—that Houston industrial recorded overall positive net absorption. The net absorption (5.6 million sq. ft.) that took place throughout the greater Houston market during Q1 2022 outpaced the amount of supply delivered (2.8 million sq. ft.) by almost 100% and increased over 250% from Q1 2021. All told, the Houston industrial market recorded 32 million sq. ft. of absorption during 2021—its highest annual total ever, ranking fifth in the nation for net absorption—the difference between move-ins versus move-outs.
INDUSTRIAL LEASING MAINTAINS RECORD-HIGH LEVELS
Year-over-year leasing volumes in Q1 2022 compared to Q1 2021 were up 7% annually representing a return to growth in leasing activity in the aftermath of the pandemic. The volume of signed lease transactions during the first quarter was 11.3 million sq. ft.—up from the previous quarter’s 9.9 million sq. ft. and a year ago at 10.5 million sq. ft. Notable transactions that contributed to the activity include; Macy’s 736,000 sq. ft. deal to relocate from its East End distribution center to the under-construction Interchange 249 Business Park in Tomball; NFI’s signed lease for 341,000 sq. ft. in Cedar Port Phase III Business Park in Baytown; an inked deal for 277,000 sq. ft. at the Cedar Port Freezer property under construction in Baytown; and 220,000 sq. ft. leased by WSS Distribution in Reed’s Landing Business Park in the North Hardy Toll Road submarket.
CONSTRUCTION
Houston continues to experience record amounts of industrial product under construction, with the current volume at 18.4 million sq. ft., with about 29% of that space already spoken for. On a percentage basis, the Northwest submarket represents 35% of all space under construction at 6.4 million sq. ft., followed by the Southeast submarket at 4.3 million sq. ft., representing 23%. In 2021, the Houston metro saw 24 million sq. ft. in deliveries as developers worked to keep up with demand driven by growth in e-commerce, homebuilding, and population growth, all the while having endured the previous two years of fighting Covid-19.
INVESTMENT SALES TRENDS
Real Capital Analytics data reports quarterly industrial sales volume for Q1 2022 in the Greater Houston area at $449 million, down 25% from the amount in Q1 2021 at $597 million. The primary capital composition for buyers in the first quarter was made up of 54% institutional investors, 31% private, and 11% REIT/listed. For sellers, the majority were 64% REIT/listed investors, 30% private, and 7% user/other. In a recent significant transaction, The Arden Group acquired 9525 Wallisville, a two-building, 203,421 sq. ft. complex located in the Northeast I-10 submarket for an undisclosed price. The property was built in 1999 and renovated in 2008 and 2014.
RENTAL RATES CONTINUE TO TREND UPWARD
The average monthly rental rate for the entire Houston market was $0.68 per sq. ft. as of the end of Q1 2022, up quarter-over-quarter at $0.65 per sq. ft. and up from $0.62 per sq. ft. year-over-year. The monthly average rate for Flex space is currently at $0.86 per sq. ft., manufacturing rates are at $0.60, and warehouse/distribution space sits at $0.66. The Southwest ($0.75 PSF) and Northwest ($0.72 PSF) submarkets currently have the highest monthly overall average rate, followed by the North ($0.70). As demand has ramped up, industrial developers are paying significantly more for well-positioned land than a few years ago. After years of slow growth, these costs may be passed down to tenants in the future.
PORT HOUSTON CARGO CONTINUES RECORD PACE
Container volume at Port Houston in February totaled 271,399 Twenty-Foot Equivalent Units (TEUs), which is 37% more than the same month in 2021. In the first two months of 2022, container volume at Port Houston totaled 594,826 TEUs, an increase of 31% year-to-date. This is the biggest February Port Houston has ever seen in terms of containers. In response to this strong growth, projects at the container terminals, like opening additional gates at the Barbours Cut Container Terminal, are being accelerated. In addition, steel moving through Port Houston’s multi-purpose facilities cargo is also steadily increasing. Steel imports are up 167% this month compared to February of last year, a positive sign for the energy sector.
Leta Wauson
Director of Research
[email protected]
tel 713 275 9618