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Houston’s average industrial vacancy rate increased 50 basis points quarter-over-quarter to 6.6%, and an increase of 130 basis points year-over-year. At the end of the third quarter Houston had 36.8 million sq. ft. of vacant industrial space for direct lease and an additional 2.3 million sq. ft. of vacant sublease space.


EXECUTIVE SUMMARY

Vacancy rate increases

Houston’s average industrial vacancy rate increased 50 basis points quarter-over-quarter to 6.6%, and an increase of 130 basis points year-over-year. At the end of the third quarter Houston had 36.8 million sq. ft. of vacant industrial space for direct lease and an additional 2.3 million sq. ft. of vacant sublease space. With overall vacancy at 39 million sq. ft., positive quarterly absorption of 616,000 sq. ft.— down 84.0% compared to Q3 2018—does little to move the needle. The record-breaking levels of new construction have assisted in pushing the vacancy rate up, as there has been 4.5 million sq. ft. of vacant space delivered to the market in 2019—about half of the total 9.0 million sq. ft. completed. The vacancy rate for Class A properties is at 9.6%, up from 6.6% this time last year. The overall monthly average asking triple-net rent has steadily grown to its current rate of $0.61 per sq. ft., a 2.7% increase from a year ago.

Job growth remains healthy

The Houston metro created 81,900 jobs, a 2.7% increase, in the 12 months ending August 2019 according to the Texas Workforce Commission. The sectors adding the most jobs over the past 12 months were professional, scientific, and technical services (21,100); manufacturing (11,500); and other services (9,700). Houston’s unemployment rate was 3.9% in August, down from 4.4% in August of last year. The Texas rate in August was 3.6%, the U.S. rate 3.8%. The rates are not seasonally adjusted. The U.S. Energy Information Administration (EIA) reported that the closing spot price for a barrel of West Texas Intermediate (WTI) averaged $53.55 per barrel during the second week of October 2019, down $19.62 from the same period in 2018. The EIA forecasts an average WTI price of $54.43 a barrel for 2020, down 3.7% from the forecast issued in September.

Broker’s Perspective

The population in Harris County continues to grow at a record pace—per the latest United States Census Data, the population in Harris County has seen a 0.76% increase in the past year (as of August 28, 2019). As the population in Houston and surrounding areas continues to flourish, so does the demand to distribute goods. The relatively steady price of oil combined with the population growth has made the Houston area a very desirable market for industrial developers. However, even with the healthy population growth, the positive absorption in the industrial market only totaled 616,000 sq. ft. during the third quarter. The 4.5 million sq. ft. of new construction that was delivered to the market in 2019 has caused a bump in the vacancy rate, which is at 9.6%—up three percentage points from this time a year ago.

With that said, the trend of moderate positive absorption should continue through the fourth quarter of 2019. The main contributing factor is that job growth remains steady in the Houston market. In fact, Houston’s unemployment rate was 3.9% in August, down from 4.4% this time last year. However, I do expect to see rental rate growth to slow and larger concessions to tenants being offered (more free rent and greater TI allowances) until the vacancy rate decreases.

I do believe Houston will continue to be one of the nation’s premier industrial markets moving into 2020. Several factors will contribute to the overall economy in Houston—possibly one of the biggest factors being the upcoming Presidential election. In any event, we’ll have a clearer idea of what we may be able to expect in the Houston industrial market in 2020 as we get closer to the end of the year.

Chris Kugle
Partner
NAI Partners

MARKET OVERVIEW

New supply continues to outpace demand

Supply has outpaced demand for the last six quarters in the Houston industrial market. The amount of industrial space delivered to the market during Q3 2019 was 4.1 million compared to the 616,000 sq. ft. of net absorption—the third-widest margin ever recorded. For existing buildings, net absorption is the measure of total square feet occupied (indicated as a Move-In) less the total space vacated (indicated as a Move-Out) over a given period of time. The third quarter’s net absorption of 616,000 sq. ft. was comprised of positive 1.1 million sq. ft. of Warehouse/Distribution space, negative 294,000 sq. ft. of Flex space, and negative 172,000 sq. ft. of Manufacturing space. Direct space makes up 1.4 million sq. ft. of the transactions and sublease space accounted for negative 814,000 sq. ft.

Significant move-ins and move-outs

Positive influences on overall net absorption include major move-ins during the third quarter, involving 727,600 sq. ft. of space occupied by Grocers Supply in the North Hardy Toll Road submarket; 275,600 sq. ft. of space absorbed by Builders FirstSource at 11711 Clay Road in the Northwest Inner Loop submarket; and 144,620 sq. ft. of space occupied by World Trade Distribution in Portwall Distribution Center in the Northeast Inner Loop submarket. Negative effects on overall net absorption involve Plastipak moving out of Bayport North Industrial Park adding 274,417 sq. ft. into the sublease market and Conn’s vacating the warehouse at 2425 Turning Basin Dr. adding 127,046 sq. ft. of sublease space.

Port Houston—the crown jewel of the Texas economy

Greater Port Houston, which is comprised of about 200 facilities along the ship channel, has a national economic impact of nearly $802 billion annually and supports about 3.2 million jobs. In Texas alone, the economic value of the port is about $340 billion. Operationally, the facilities have handled close to 30 million tons of cargo through August, an increase of 7% over last year as both container volumes and steel have maintained their upward trends in 2019. The number of twenty-foot equivalent units or container TEUs handled through August totaled nearly two million, an increase of 11% compared to this time last year. Port officials expect to approach three million by the end of this year. Port Houston continues to be among the fastest-growing container ports in the country, fueled by an increasing number of import distribution centers in the Houston region and a robust manufacturing base in the State of Texas.

Industrial investment sales

Real Capital Analytics data reports quarterly industrial sales volume for Q3 2019 in the Greater Houston area at $405.6 million, compared to third quarter 2018 at $1 billion. In Q3 2018 San Francisco-based Prologis increased the size of its Houston portfolio with the acquisition of Denver-based DCT Industrial Trust, an $8.4 billion merger. The primary capital composition for buyers in the third quarter was made up of 65.6% private, and 11.0% REIT/listed. For sellers, the majority was 46.6% private, and 15.2% REIT/listed. In August DRA Advisors sold Willowbend Business Park to Angelo, Gordon & Co. for an undisclosed amount. The sale was for a total of eight industrial and flex buildings located at 3605-3651 Willowbend Blvd. in the Southwest submarket. The eight buildings total 654,352 sq. ft. and were 94% occupied at time of sale with 37,000 sq. ft. of vacant space available for lease.

Leasing activity

The volume of square footage signed during the third quarter was at 6.6 million sq. ft.—close to the previous quarter’s 6.5 million sq. ft.—down 29.3% from this time last year (9.3 million sq. ft.), although ecommerce and logistics activity continue to be robust in Houston. The largest leases signed in Q3 2019—which is comprised of both new leases and renewals—include the Rooms To Go renewal for 373,860 sq. ft. at 2244 N. Mason Road in Katy; VEE Express renewing 188,000 sq. ft. at 3401-3403 Navigation Blvd. in downtown Houston; and ProBuild’s renewal of 171,850 sq. ft. at 16245 Port NW in the West Outer Loop submarket. Strong demand from port-related trade and exports, particularly petrochemicals and plastics, continue to create the need for industrial space in and around Houston.

Average asking NNN rent increases

Monthly rental rates for the entire market on average have maintained $0.61 per sq. ft., as of the third quarter of 2019, unchanged from the previous quarter, with a minor increase seen from $0.60 per sq. ft. at this time last year. The monthly average rate for Flex space is currently at $0.76 per sq. ft.; Manufacturing rates are at $0.63; and Warehouse/Distribution space sits at $0.58. The North and Southeast submarkets currently have the highest monthly overall average rate at $0.67 per sq. ft., followed by the CBD and Southeast submarkets at $0.63. As new projects with high quality space are delivered to the market, coupled with the rising costs to developers, rental rates could continue to increase in the future.


Leta Wauson
Director of Research
[email protected]
tel 713 275 9618

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