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Houston Industrial records fourth straight quarter of more than 9 million sq. ft. of leasing activity.
STRONG MOMENTUM CONTINUES
Q3 2021 marks the second consecutive quarter in over three years that demand for industrial space (11.6 million sq. ft.) outpaced supply (6.0 million sq. ft.) in the Houston metro. The previous quarter, Q2 2021, was the first time since 2017 that the amount of net absorption was greater than the amount of square feet delivered in a single quarter. Leasing was also once again robust, with Houston recording its fourth straight quarter of activity of more than 9 million sq. ft.—for context, the historical average quarterly tally of leasing activity going back to 2011 is 7.7 million sq. ft. With 18.2 million sq. ft. delivered since the beginning of the year, 15 million sq. ft. under construction, and another 30 million sq. ft. planned through 2022, according to CoStar, the demand for industrial real estate may continue to outpace supply. According to commercial real estate association NAIOP’s most recent Industrial Space Demand Forecast, the nationwide push toward industrial development is likely to continue for the rest of the year and through 2022—and that includes Houston.
CRUDE PRICES SURGE ABOVE $81 A BARREL
Through the first eight months of this year, the Houston area has created 56,600 jobs. Given the impact the Delta variant is having, Houston is likely to finish the year with a net gain of 75,000 to 100,000 jobs, still leaving the region at least 100,000 jobs below pre-pandemic employment levels. As of the end of September, the number of weekly drilling rigs operating in U.S. oil fields increased by seven, rising to 528, nearly double the 266 rigs operating a year ago and the highest since April 2020. The tally, however, remains far below the peak of almost 1,100 at the end of 2018, according to oilfield services firm Baker Hughes. The rig count is a leading indicator of the nation’s oil and gas production. As of the publication date of this report, crude prices climbed above $81 per barrel, the highest in seven years.
OVER 12 STRAIGHT YEARS OF POSITIVE NET ABSORPTION
The third quarter of 2021 marked 49 straight quarters—equal to over 12 years—the Houston Industrial market recorded overall positive net absorption. Houston ranked fifth in terms of trailing 12-month net absorption out of all U.S. markets in Q3 2021, surpassed only by Dallas-Fort Worth, the Inland Empire, Chicago, Atlanta, and Phoenix, according to Costar. The significant absorption taking place throughout the greater Houston market is easing the amount of supply created by over 50 million sq. ft. delivered in 2019 and 2020. industrial Houston
LEASING ACTIVITY FUELED BY ECOMMERCE AND CONSUMER GOODS
Leasing volumes in the previous three quarters doubled over the prior three quarters—representing a significant return to growth in leasing activity in the immediate wake of the pandemic. The volume of signed lease transactions during the third quarter was 9.1 million sq. ft.—down from the previous quarter’s record-breaking 14.4 million sq. ft., registering a massive 33.9 million sq. ft. of transactions three-quarters of the way through 2021. Amazon has led leasing this year in Houston as it has in many U.S. markets, accounting for more than 1.2 million sq. ft., followed by Ferguson Enterprises (750,000 sq. ft.), Custom Goods (700,000 sq. ft.), Living Spaces Furniture (685,000 sq. ft.), and Clark Associates (645,000 sq. ft.). Amazon has leased more than 4.2 million sq. ft. in Houston since 2019, nearly triple any other company. The Wholesale Trade, Transportation & Public Utilities and Retail Trade sectors accounted for more than 75% of confirmed leasing activity in 2021, according to CoStar. The largest leases in the third quarter include Crawford Electric signing a deal for 500,000 sq. ft. at the West Ten Business Park in Katy; Yokohama Off-Highway Tires leased 300,000 sq. ft. at the South Belt Central Business Park in the South submarket; and Amazon also leased 300,000 sq. ft. at the HITC Logistics Park in Humble.
Houston continues to experience record amounts of industrial product under construction with the current volume at 14.7 million sq. ft., with about half of that space already spoken for. On a percentage basis, the Southeast submarket represents 28% of all space under construction at 4.2 million sq. ft., followed by the North submarket at 3.7 million sq. ft. representing 25%. industrial Houston
PORT HOUSTON SETS NEW RECORD FOR CONTAINERS
2021 continues to show strength as TEU volume at Port Houston surpassed 2020’s numbers again in August, recording its highest month ever for total TEUs at 320,086, an increase of 29% compared to last August. It also was its highest monthly loaded import TEUs on record, at 159,791. Year-to-date, Port Houston has surpassed the 2 million TEU mark, a 16% increase from this time last year. Driving the record levels of TEUs are new importers to the Houston area that have realigned their gateway strategy and distribution center networks, combined with increased consumer spending and retailers building up inventory to meet demand. industrial Houston
INVESTMENT SALES TRENDS
Cap rates and per square foot sale prices for institutional quality distribution buildings are setting market records. Cap rate expectations for a new Class A institutional distribution building, with a strong credit, long term tenant, are getting to be sub 4.5%. And the per square foot sale prices associated with those deals are pushing north of $85/sq. ft. Additionally, more and more developers are circling the market trying to find land sites to build new industrial parks. This includes developers who already have existing properties in the market as well as more and more developers from out of town looking to get into the market. A lot of this is driven by the large amount of equity being raised nationally that investors are looking to place in industrial real estate. The scarcity of landsites in proximity to Houston is raising the price for the rare developable land sites that meet that criteria, and forcing developers to look further and further out from the city to find sites that make sense on a price/access /infrastructure /flood plain comparison. As for the manufacturing building portion of the market, pricing is going up as well, while availability is going down. industrial Houston
AVERAGE ASKING NNN RENT
The average monthly rental rate for the entire Houston market was $0.64 per sq. ft. as of the end of Q3 2021, unchanged quarter-over-quarter and year-over-year. The monthly average rate for Flex space is currently at $0.88 per sq. ft.; Manufacturing rates are at $0.54; and Warehouse/Distribution space sits at $0.62. The Southwest ($0.77 PSF) and North ($0.69 PSF) submarkets currently have the highest monthly overall average rate, followed by the Northwest ($0.66). 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. industrial Houston
Director of Research
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