Industrial market shifts towards neutral conditions with rising vacancy and decreasing construction

EXECUTIVE SUMMARY

Q2 in Review
By the end of Q2 2024, the overall vacancy rate in the Houston Industrial market rose 30 basis points over the past quarter, from 7.4% to 7.7%. Net absorption was a healthy 3.2 million sq. ft., up 32% from the previous quarter’s 2.5 sq. ft. Year to date, net absorption is at 5.7 million sq. ft. Both leasing activity and net absorption increased over the past quarter by 26% and 32%, respectively. Rates remained unchanged over the past quarter but remain 3.9% higher than one year ago. The construction pipeline has been decreasing over recent quarters (down 60% from one year ago), but currently outpaces demand, making it likely that the market will move from a landlord market to more neutral conditions (8% to 10%) vacancy in the latter half of 2024. Still, there is little to no indication of a significant reduction in asking rates for most submarkets for the foreseeable future as overall market fundamentals remain healthy.

Houston Economic Update
Houston’s labor market growth was strong and broad. In the energy sector, production jobs declined year over year while growth has been concentrated in mining-related services. Exports of energy goods through the Port of Houston ticked down in March. Inflation slowed in April, and real wages were up year over year. Houston added jobs at a strong pace in April. Annualized total nonfarm job growth from March to April was 4.3% (or 12,110 jobs). Annualized employment growth was 2.0% (17,163) from January through April. The strongest gains were in education and health services (4.2%), leisure and hospitality (3.7%) and financial activities (3.6%). Education and health services added 4,700 jobs while leisure and hospitality added 3,273. Trade, transportation and utilities was the only sector to shed jobs during that same period, declining 0.7% (-1,217 jobs).

MARKET OVERVIEW

Leasing Up 48% Year-Over-Year
Quarterly leasing velocity—comprised of new leases and renewals—stood at 10.8 million sq. ft.—up 48% from 7.3 million sq. ft. in Q2 2023. Year to date, leasing activity is at 19.3 million sq. ft., compared to the prior year-to-date figure of 16.5 million sq. ft. Notable new leases in Q2 2024 include Integra Mission Critical subleasing 1.2 million sq. ft. at North Hardy Toll Road Building 4, eFulfill leasing 368,099 sq. ft. at Post Oak Logistics Park, and Lecangs leasing 204,597 sq. ft. at Northwest Hwy 6 in Cypress. Renewals included Fredrick Trucking at Bayport North Logistics Center 1 and World Trade Distribution at Eastport 1.

Positive Net Absorption Despite Slowing Demand
Net absorption—move-ins minus move- outs—is at 3.2 million sq. ft., 17% down from the prior year’s 3.9 million sq. ft. Despite the fluctuations in absorption, Houston’s industrial market has remained positive for almost 15 years—or 59 consecutive quarters—dating back to 2.6 million sq. ft. in Q3 2009. Notable move-ins for Q2 2024 include Tigerhawk Logistics taking 328,048 sq. ft. at 4388 Borusan Rd in Baytown, RPM Warehouse taking 291,459 sq. ft. at 6462 Northdale St, and Keen Transportation taking 273,480 sq. ft. at 7561 S Sam Houston Pkwy E.

Vacancy Rate Increases to 7.7%
The overall vacancy rate in Houston’s industrial market is at 7.7%. Quarter over quarter, the vacancy rate increased 30 basis points from 7.4%. Year over year, the vacancy rate increased 150 basis points from 6.2%. Flex, Manufacturing, and Warehouse/Distribution space had vacancy rates of 9.0%, 2.4%, and 8.4%, respectively. Warehouse/Distribution space continues to see the biggest increase in vacancy, as very little flex and manufacturing space has been delivered over recent quarters. As new deliveries continue to outpace demand, the overall vacancy rate is forecasted to move the total vacancy rate into neutral territory (8% to 10%) in the second half of 2024.

New Supply Continues to Cool and the Pipeline Decreases Further
New deliveries for the quarter totaled 7.3 million sq. ft., this is only slightly down from last quarter’s 7.5 million sq. ft.  Still, this is 23% less than this time last year. The construction pipeline currently underway continues to decrease at an even faster pace; it is down 60% over the past year. On the submarket level, the Southeast and Northwest submarkets have the largest amounts of space currently under construction at 3.8 million sq. ft. and 2.6 million sq. ft., respectively.

Investment Sales Trends
CoStar Capital Market Analytics reports the cumulative 12-month sales volume for Q2 2024 at $335 million. Over the past year, 553 deals were completed in the Houston industrial market with an average transaction price of $114 and an average cap rate of 7.8. Notable recent sales transactions in include Cabot Properties purchasing Rankin 45 Distribution Center, a 356,236-sq. ft. warehouse at 13800 North Freeway, Sealy & Company purchasing Pederson Logistics Center, a 343,760-sq. ft. distribution center in Katy, and O’Drill MCM (an owner-user) purchasing Union Crossing, a 231,839-sq. ft. warehouse at 22533 NW Lake Dr.

Record-High Rental Rate
The average monthly rental rate (NNN) for Houston’s industrial market remained unchanged at $0.79 per sq. ft.—a record- high for the metro’s industrial sector—up 3.9% from the previous year’s $0.76 per sq. ft. The average monthly rate per square foot for Flex space stood at $0.91 per sq. ft., while the rates for Manufacturing space and Warehouse/Distribution space were $0.76 per sq. ft. and $0.75 per sq. ft., respectively. The Southwest submarket commands the highest  overall  monthly  average  rate  at$0.84 per sq. ft., followed by the Northeast and North submarkets at $0.82 and $0.81 per sq. ft., respectively.

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