Resilience continues to define Houston’s Industrial real estate market

EXECUTIVE SUMMARY

Q1 In Review
By the end of Q1 2024, the overall vacancy rate in the Houston Industrial market rose 170 basis points year-over-year, from 5.7% to 7.4%. Net absorption is at 2.5 million sq. ft., 44% down from the prior year’s 4.4 million sq. ft. With a sub 8% total vacancy rate, the overall market remains landlord favorable with overall asking rates up 7.4% over the past year. This resulted in the overall market reaching a new record-high average monthly rental rate (NNN) of $0.79 per sq. ft.

Houston Economic Update
Houston’s unemployment rate has held steady over the past few months and remains at 4.4% as of December 2023. Houston employment grew 0.8%, annualized, from September through December 2023, a net increase of 6,517 jobs. Education and health services led growth, rising 6.7% (7,405 jobs) and offsetting declines in other sectors. Overall, the decline in trade, transportation and utilities, professional and business services, leisure and hospitality, and manufacturing amounted to a loss of 4,342 jobs in the fourth quarter. Since the pandemic spike, Houston unemployment has been higher than both the state and nation, likely due to the slower recovery of oil and gas jobs and strong labor force growth. Among the major sectors, oil and gas is one of three that remained below January 2020 employment levels in Texas in December 2023 (the others are construction and manufacturing). Houston’s labor force has grown by 3.8% since attaining its pre-pandemic level of employment in April 2022, aided by migration to the region. By comparison, labor force growth was 3.8% in Texas and 2.2% nationally since April 2022.

MARKET OVERVIEW

Leasing Down 15% Year-Over-Year
Quarterly leasing velocity—comprised of new leases and renewals—stood at 8 million sq. ft.—down 15% from 9.4 million sq. ft. in both Q4 2023 and Q1 2023, respectively. Recently signed deals include Solar Plus signing a lease for 567,140 sq. ft. at Nexus North Logistics Park, United Airlines signing a lease for 509,600 sq. ft. at 59 Logistics Center and Amazon signing a 206,333 sq. ft. new lease at Hardy Industrial Center.

Positive Net Absorption Continues 14 Year Streak
Net absorption—move-ins minus move-outs—is at 2.5 million sq. ft., up 4.5% over the last quarter, but 44% down from the prior year’s 4.4 million sq. ft. Despite the decrease, net absorption in Houston’s industrial market has remained positive for over 14 years—or 58 consecutive quarters—dating back to 2.6 million sq. ft. in Q3 2009. Lease up time has increased slightly but is still very healthy at 5.2 months on average. Notable move-ins for early 2024 include Distribution Alternatives taking 855,610 sq. ft. at the Kingsland Ranch Logistics Park in Brookshire, Imperial Dade taking 293,715 sq. ft. at Lone Star Logistics Park and Dresser taking 248,240 sq. ft. at Bayport South Business Park.

Vacancy Rate Increases to 7.4%
The overall vacancy rate in Houston’s industrial market is at 7.4%. Quarter-over-quarter, the vacancy rate increased 40 basis points from 7.0%. Year-over-year, the vacancy rate increased 170 basis points from 5.7%. Flex, Manufacturing, and Warehouse/Distribution space had vacancy rates of 9.1%, 2.0%, and 8.1%, respectively. As new deliveries continue to outpace demand, the overall vacancy rate is forecasted to reach 8% by mid-2024.

Supply Cools Down Towards End of Year
Industrial projects currently under way have significantly decreased over the past year and are now below the ten-year average (18.2 million sq. ft.). By the end of Q1 2024, Houston’s industrial construction pipeline decreased to 16.4 million sq. ft., 24% down from the prior quarter and 56% down from the prior year’s 37.3 million sq. ft. Deliveries are at 7.4 million sq. ft., 15% down from the previous quarter’s 9.4 million sq. ft. The North submarket led deliveries in the first quarter with just under 3 million sq. ft. completed, followed by the Northeast submarket at 682,896 sq. ft. Some notable deliveries in early 2024 include Logistics Center II, an 800,405-sq.-ft. distribution center in the Southeast submarket and Port 10 Logistics Center Building 3, a 450,873-sq.-ft. distribution center in Baytown.

Investment Sales Trends
CoStar Capital Market Analytics reports the cumulative 12-month sales volume for Q1 2024 at $330 million, representing 21.6 million sq. ft. of industrial sales. Over the past year, 609 deals were completed in the Houston industrial market with an average transaction price of $109 and an average cap rate of 7.7. Notable sales transactions in Q1 2024 include Sealy acquiring the Great 290 Distribution Center, a 500,2840-sq.-ft. industrial building occupied by Daikin Comfort Technologies, and Smart Supply Chain’s purchase of 15005 E Hampton Circle, which they will fully occupy.

Record-High Rental Rate
The average monthly rental rate (NNN) for Houston’s industrial market increased to $0.79 per sq. ft.—a record-high for the metro’s industrial sector—up 7.4% from the previous year’s $0.74 per sq. ft. The average monthly rate per square foot for Flex space stood at $0.93 per sq. ft., while the rates for Manufacturing space and Warehouse/Distribution space were $0.71 per sq. ft. and $0.76 per sq. ft., respectively. The Northwest submarket commands the highest overall monthly average rate at $0.86 per sq. ft., followed by the Southwest submarkets at $0.85 per sq. ft.

Steve Triolet
SVP of Research and Market Forecasting
tel 214 223 4008
[email protected]