14th straight year of positive net absorption for Houston Industrial market

EXECUTIVE SUMMARY

Q4 In Review
By the end of Q4 2023, the overall vacancy rate in the Houston Industrial market rose 180 basis points year-over-year, from 5.2% to 7.0%. Net absorption is at 2.3 million sq. ft., 68% down from the prior year’s 7.3 million sq. ft. Year-to-date, net absorption is at 18.5 million sq. ft. Many tenants have reduced their need for Warehouse/Distribution space due to economic uncertainty and higher borrowing costs. During the fourth quarter, HRDC Shell Lubricants moved out of 9255 Railwood Drive, and Goodman Distribution moved out of 22533 Northwest Lake Drive, returning 300,000 sq. ft. and 231,839 sq. ft. of industrial space to the market, respectively. Leasing activity is at 9.3 million sq. ft., 38% down from 15.1 million sq. ft. last year. Lastly, the average monthly rental rate (NNN) reached $0.78 per sq. ft.—a record-high for the metro’s industrial sector.

Houston Economic Update
Houston’s unemployment rate decreased to 4.4% in October 2023, slightly down from 4.7% in September 2023, according to the latest release of Houston’s Economic Indicators. The metro’s jobless rate beat the state and the national rates at 4.1% and 3.9%, respectively. Houston’s employment reached 3.4 million in October 2023—growing an annualized 3.7% (30,474 jobs) in the three months ending in October. The largest job gains by sector included: leisure and hospitality (+8,899 jobs, 10.3%), government (+9,578 jobs, 9%), information and other services (+3,529 jobs, 9.2%). The largest job declines by sector included: construction (-4,417 jobs, -7.5%), professional and business services(-13,502 jobs, -2.4%), and oil and gas(-1,193 jobs, -1.7%).

MARKET OVERVIEW

Leasing Down 38% Year-Over-Year
Quarterly leasing velocity—comprised of new leases and renewals—stood at 9.3 million sq. ft.—down 38% from 15.1 million sq. ft. in Q4 2022. Year-to-date, leasing activity is at 40.3 million sq. ft., compared to the prior year-to-date figure of 56.6 million sq. ft. By year-end, 395 deals were signed, averaging 46,606 sq. ft., with notable exceptions from tenants such as ExxonMobil (525,000 sq. ft.) in October, and Wisenbaker Builder Services (409,795 sq. ft.) in November.

Positive Net Absorption Despite Slowing Demand
Net absorption—move-ins minus move-outs—is at 2.3 million sq. ft., 68% down from the prior year’s 7.3 million sq. ft. Despite the decrease, net absorption in Houston’s industrial market has remained positive for over 14 years—or 57 consecutive quarters—dating back to 2.6 million sq. ft. in Q3 2009. Following an active prior quarter (Q3 2023)—which tallied 7.1 million in sq. ft. of net absorption—Houston’s industrial market cooled down towards the end of the year. This is partially due to the slowing demand for Warehouse/Distribution space. During the fourth quarter, HRDC Shell Lubricants moved out of 9255 Railwood Drive, and Goodman Distribution moved out of 22533 Northwest Lake Drive, returning 300,000 sq. ft. and 231,839 sq. ft. of industrial space to the market, respectively. Year-to-date, net absorption is at 18.5 million sq. ft. Despite the cooldown, Houston’s industrial market remains resilient—the 12-month total for industrial space absorbed rose to second among the major metros in the U.S., according to CoStar Analytics.

Vacancy Rate Increases to 7.0%
The overall vacancy rate in Houston’s industrial market is at 7.0%. Quarter-over-quarter, the vacancy rate increased 30 basis points from 6.7%. Year-over-year, the vacancy rate increased 180 basis points from 5.2%. Flex, Manufacturing, and Warehouse space have vacancy rates of 8.8%, 1.8%, and 7.7%, respectively. Warehouse/Distribution space was the only product line to experience an increase in its vacancy rate (240 basis points) year-over-year. As new deliveries continue to outpace demand, the overall vacancy rate is forecasted to reach 8% by mid-2024.

Supply Cools Down Towards End of Year
Elevated borrowing costs have continued to reduce the onset of new supply within Houston’s industrial market in recent months. By the end of Q4 2023, Houston’s industrial construction pipeline had decreased to 21.4 million sq. ft., 12% down from the prior quarter’s 24.3 million sq. ft., and 42% down from the prior year’s 37.1 million sq. ft. Deliveries are at 4.9 million sq. ft., 58% down from the previous quarter’s 11.8 million sq. ft., and 8% down from the previous year’s 5.4 million sq. ft. However, year-to-date deliveries registered at 34.1 million sq. ft., 38% up from 24.7 million sq. ft. last year. The Southeast submarket led year-to-date deliveries at 8.6 million sq. ft. (25%), followed by the Southwest submarket at 7.1 million sq. ft. (21%). Some of the most notable deliveries in 2023 included a 1.2 million-sq.-ft. distribution center at 7505 Fisher Road (TGS Cedar Port DC4) in September, and 1.2 million-sq.-ft. warehouse (Building 4) at 15550 Milner Road in December.

Investment Sales Trends
CoStar Capital Market Analytics reports the cumulative 12-month sales volume for Q4 2023 at $466 million, down 79% from $2.1 billion in Q4 2022. By year-end, 985 deals were completed in the Houston industrial market with an average transaction price of $106 and an average cap rate of 8.4%. Notable sales transactions in 2023 included Bedrock Logistics acquiring a 277,235-sq.-ft. industrial building from Investment & Development Ventures at 7300 Thompson Road for $29.5 million in July, and LFM Capital acquiring a 113,175-sq.-ft. distribution center from Bourguignon Family Trust for $13.6 million in September.

Record-High Asking Rent
The average monthly rental rate (NNN) for Houston’s industrial market increased to $0.78 per sq. ft.—a record-high for the metro’s industrial sector—up 9% from the previous year’s $0.72 per sq. ft. The average monthly rate per square foot for Flex space stood at $0.96 per sq. ft., while the rates for Manufacturing space and Warehouse/Distribution space were $0.75 per sq. ft. and $0.74 per sq. ft., respectively. The Southwest submarket commands the highest overall monthly average rate at $0.86 per sq. ft., followed by the North and Northwest submarkets at $0.81 per sq. ft.

Alex Babcock
Senior Research Analyst
[email protected]
tel 713 275 9618