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Houston industrial

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Houston Industrial posts record-breaking 29 million sq. ft. of net absorption in 2021.


EXECUTIVE SUMMARY

HOUSTON’S INDUSTRIAL MARKET CONTINUES TO SET RECORDS
Q4 2021 marks the third consecutive quarter that demand for industrial space (9.7 million sq. ft.) outpaced supply (4.7 million sq. ft.) in the Houston metro—a streak not seen since 2017. Leasing was also once again strong, with Houston recording its fifth straight quarter of activity of more than 8 million sq. ft. For context, going back ten years, the average quarterly tally of leasing activity is 7.3 million sq. ft. With 20 million sq. ft. delivered during 2021, 17 million sq. ft. under construction, and another 36 million sq. ft. proposed through 2023, 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 through 2022—with Houston continuing to play a significant role.

WILL 2022 USHER IN $100 OIL?
Crude oil prices rose in 2021 as COVID-19 vaccination rates increased, pandemic-related restrictions relaxed, and a growing economy resulted in global petroleum demand rising faster than petroleum supply. The increased demand for petroleum and crude products boosted energy prices by an average of 59% last year that included the increase of West Texas Intermediate crude by 62%, according to the S&P Goldman Sachs Commodity Index. Severe weather involving the February freeze and back-to-back hurricanes along the Gulf Coast also contributed to spiking energy prices. Experts expect 2022 to also show increases as demand outstrips supply. The opening price as of January 17, 2022 of WTI crude oil was $84.32 per barrel and the number of weekly drilling rigs operating in U.S. oil fields rose to 601, an increase of 228 rigs that were operating a year ago. The rig count is a leading indicator of the nation’s oil and gas production.


MARKET OVERVIEW

RECORD-BREAKING 29 MILLION SQ. FT. OF NET ABSORPTION IN 2021
The industrial market’s momentum continued right on through to the end of the year, with the fourth quarter of 2021 marking 50 straight quarters—equal to over 12 years—that Houston industrial recorded overall positive net absorption. All told, the Houston industrial market recorded 29 million sq. ft. of absorption for the year—its highest annual total ever. Houston ranked fifth in the nation for absorption—the difference between move-ins versus move-outs—over the past year, with close to 30 million sq. ft. absorbed—also a record for the metro. The significant absorption that took place throughout the greater Houston market during 2021 outpaced the amount of supply delivered (20 million sq. ft.) by over 40%.

INDUSTRIAL LEASING MAINTAINING RECORD-HIGH LEVELS
Year-over-year leasing volumes in 2021 compared to 2020 were up 30% annually representing a significant return to growth in leasing activity in the aftermath of the pandemic. The volume of signed lease transactions during the fourth quarter was 8.8 million sq. ft.—down from the previous quarter’s 10.6 million sq. ft., registering a massive record-breaking 44.2 million sq. ft. of transactions to end 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 (750,775 sq. ft.), Chewy (687,902 sq. ft.), Living Spaces Furniture (685,400 sq. ft.), and WebstaurantStore (643,940 sq. ft.). The largest leases in the fourth quarter include SRS Distribution signing a lease for 144,045 sq. ft. at First Grand Parkway Commerce Center in Katy; Texas Tissue inking a deal for 143,690 sq. ft. in Hardy Distribution Center; and Target leasing 136,000 sq. ft. at Valley Ranch Town Center in New Caney.

CONSTRUCTION
Houston continues to experience record amounts of industrial product under construction with the current volume at 16.7 million sq. ft., with about 34% of that space already spoken for. On a percentage basis, the Northwest submarket represents 38% of all space under construction at 6.8 million sq. ft., followed by the Southeast submarket at 4.8 million sq. ft. representing 26%. Over the past year, the Houston metro saw over 20 million sq. ft. in deliveries as developers are working to keep up with demand driven by growth in ecommerce, homebuilding, and population growth, all the while having endured about two years of fighting COVID-19, there is now a better understanding of the virus and how to lessen the damage it causes.

CONTAINERS SURPASS THREE MILLION TEUS AT PORT HOUSTON
Year-to-date through November, container TEUs are up 16% at Port Houston reaching 3,150,062 TEUs and already exceeding the 2020 annual TEUs of 3,001,164, which was a record year. November 2021 was the 9th consecutive month of double-digit growth at Port Houston for TEUs. After a slow start to the year at the Port’s multi-purpose facilities, steel jumped 182% in October and 226% in November. Year-to-date through November lumber was up 230%; steel was up 48%; bagged goods up 39%; and auto units up 13%. Port Houston container terminals are currently ranked 6th in the nation, in addition to the U.S. Army Corps of Engineers ranking the Houston Ship Channel once again at number one in total tonnage in the U.S.

INVESTMENT SALES TRENDS
Real Capital Analytics data reports quarterly industrial sales volume for Q4 2021 in the Greater Houston area at $901 million, down 3% from the amount in Q4 2020 at $928 million. The primary capital composition for buyers in the fourth quarter was made up of 48% private investors, 22% institutional, and 21% cross-border (a transaction is defined as cross-border if the buyer or major capital partner is not headquartered in the same country where the property is located). For sellers, the majority was 44% private investors, 35% institutional, and 9% user/other. A recent significant transaction, EQT-Exeter Property Group acquired Uplands Twinwood Distribution Center, a 737,630 -sq.-ft. industrial warehouse located at 2062 Woods Road in Brookshire. The property was built in 2020 and sold by Clay Development.

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 Q4 2021, unchanged quarter-over-quarter and up from $0.63 per sq. ft. year-over-year. The monthly average rate for Flex space is currently at $0.84 per sq. ft.; Manufacturing rates are at $0.56; and Warehouse/Distribution space sits at $0.62. The Southwest ($0.75 PSF) and North ($0.69 PSF) submarkets currently have the highest monthly overall average rate, followed by the Northwest ($0.68). 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.


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

Additional NAI Partners Research Reports

Houston Industrial |  Q2 2021 | Quarterly Report
Houston Industrial |  Q1 2021 | Quarterly Report
Houston Industrial | Monthly Market Report | September 2021

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