Houston industrial market records it’s ninth consecutive quarter of over 10 million-sq.-ft. of leasing activity.
EXECUTIVE SUMMARY
Balanced supply and demand in Q4 2022
The supply of industrial space, represented by deliveries (5.58 million sq. ft.), paced demand, represented by net absorption (5.41 million sq. ft.) in the Houston metro during Q4 2022. Leasing remained strong, with Houston recording its ninth consecutive quarter of more than 10 million sq. ft. of activity. For context, the quarterly average leasing activity for the five years before the current run was 7.5 million sq. ft. 24.2 million sq. ft. was delivered in 2022 (33% available), 33.5 million sq. ft. is under construction—the highest amount ever recorded— (84% available), and 17 million sq. ft. is proposed in 2023. There are no signs of demand letting up anytime soon.
Oil prices fall on global economy concerns
Oil prices fell for a second day on January 4 on worries about the strength of the global economy and surging Covid-19 infections in China. West Texas Intermediate, the U.S. standard, declined 2.2% to $75.23 a barrel. Contracts fell more than 4% on Tuesday, the first trading day of the year. According to Baker Hughes, the number of active U.S. rigs drilling for oil is at a current level of 618, down from 621 last week and up from 480 one year ago. This is a change of -0.48% from last week and 28.75%from one year ago.
MARKET OVERVIEW
Net absorption registers record levels of demand
The industrial market’s momentum continued throughout 2022, with 29 million sq. ft. of positive net absorption to end the year. Several trends maintain this activity, including continuing e-commerce growth, returning petro-chemical activity, record container volumes at the Houston Ship Channel, and nation-leading population and housing supply growth in the Texas Triangle.
Industrial construction at an all-time high
Houston continues to experience record amounts of industrial product under construction, with the current volume at 33.5 million sq. ft.—most of it encompassing warehouse/distribution space except for 391,000 sq. ft. of flex space and 130,000 sq. ft. of manufacturing space. On a percentage basis, the Northwest submarket represents 25% of all space under construction at 8.3 million sq. ft., followed by the Southeast submarket at 7.5 million sq. ft., representing 23%. In 2021, the Houston metro saw 24 million sq. ft. in deliveries as developers worked to keep up with demand driven by e-commerce, homebuilding, and population growth, all the while withstood the previous two years of battling COVID-19.
Port Houston surpasses 3.5 million TEU
In November, container volume at Port Houston grew by double digits, again, up 11% compared to November 2021. It was the fourth-highest month ever for containers at Port Houston’s Barbours Cut and Bayport container terminals. General cargo at Port Houston’s facilities grew by 45% year-to-date compared to the same time last year. Auto imports were up 141% for November 2022 and 14% year-to-date compared to 2021. Steel imports took a dip in November; however, this year’s steel volume has been substantial, making 2022 the best year for steel tonnage in more than five years.
Investment sales trends
Real Capital Analytics data reports quarterly industrial sales volume for Q4 2022 in the Greater Houston area at $418 million, down 79% from Q4 2021 at $2 billion. The primary capital composition for buyers in 2022 was made up of 53% private investors, 30% institutional, and 8% REIT/listed. For sellers, the majority were 44% private investors and 37% REIT/listed. In a recent significant transaction, Fort Capital secured a $72 million loan to acquire a seven-property industrial portfolio in the greater Houston area that comprises 23 buildings and 711,399 sq. ft of space. The combined properties have 126 lease commitments to tenants in the automotive, construction, energy, healthcare, and technology industries. The portfolio has a 76% in-place occupancy, according to Fort Capital.
Leasing activity
The volume of signed lease transactions during the fourth quarter was 10.7 million sq. ft. compared to the previous quarter’s 11.6 million sq. ft. and a year ago at 10.3 million sq. ft. Leasing volume year-to-date in the Houston metro reached 36.3 million sq. ft. Notable transactions contributing to the above-average activity in 2022 include Walmart, leasing the entire 1,021,440-sq.-ft. industrial building at 4633 Borusan Road in Baytown; Macy’s 908,853-sq.-ft. relocation of its distribution and fulfillment center to the proposed Interchange 249 Business Park; Chewy moving into 687,902 sq. ft. in NorthPoint 90 Logistics Center; and Warehouse Services 663,821 sq. ft. renewal in Citypark East Industrial.
Rental rates continue to increase
The average asking monthly rental rate for the overall Houston market was $0.72 per sq. ft. as of the end of 2022, up quarter-over-quarter at $071 per sq. ft. and up from $0.64 per sq. ft. year-over-year. The monthly average asking rate for Flex space is $0.99 per sq. ft., manufacturing rates are $0.65, and warehouse/distribution space sits at $0.68. The Southwest ($0.88 PSF) and North ($0.75 PSF) submarkets currently have the highest monthly overall average asking rate, followed by the Northwest ($0.73). As demand has increased, industrial developers are paying significantly more for well-positioned land than a few years ago.
Leta Wauson
Director of Research
[email protected]
tel 713 275 9618