Houston Industrial Market Remains Healthy with Increased Leasing Activity and Positive Absorption
EXECUTIVE SUMMARY
Q2 in Review
Houston’s industrial market remained healthy in Q2 2025, driven by an increase in leasing activity and positive net absorption, despite a slight rise in vacancy and an elevated construction pipeline. Quarterly leasing velocity ticked up slightly by 2.5% to 9.0 million sq. ft. from 8.8 million sq. ft. in Q1 2025, driven by heightened demand for warehouse/distribution space. Warehouse/distribution properties continued to dominate, followed by flex requirements. Manufacturing leasing activity cooled slightly in the second quarter. Flex and manufacturing space recorded negative absorption, while warehouse/distribution space remained the dynamic segment.
Net absorption for the quarter totaled 1.4 million sq. ft., an increase from the 1.0 million sq. ft. in Q1 2025, yet still marking 63 consecutive quarters of positive absorption since 2009. The overall vacancy rate increased slightly to 7.1% from 6.8%, reflecting a balance between demand and new deliveries of 4.0 million square feet. The construction pipeline expanded by 14% quarter-over-quarter to 19.1 million sq. ft. However, the lack of entitled properties in the greater Houston MSA continues to limit industrial supply, supporting market stability. Rental rates rose modestly to $0.86 per square foot, a 6.2% increase from Q1 2025 and an 11.7% year-over-year jump, reaching a new record high.
Investment activity remained strong, with industrial sales volume continuing upward. Election trepidation has shifted to concerns over changing tariffs, influencing occupier and investor strategies alike. Houston’s industrial market remains a steady performer, underpinned by robust leasing, controlled supply, and anticipated growing demand for manufacturing.
MARKET OVERVIEW
Houston Economic Update
The Houston unemployment rate increased from 3.9% in April to 4.2% in May, and increased from 4.0% one year ago. Houston’s labor market recorded employment growth of 0.9% year-over-year, adding 29,600 jobs —a slowdown compared to the earlier momentum in the year.
That job growth was uneven across sectors. Oil and gas employment remained a standout, growing 4.6% year over year in 2024 (3,600 jobs), bolstered by increased Texas oil production and rising retail fuel prices into early 2025. Additional sectors also showed resilience, with other services growing at an annualized rate of 2.4% (3,200 jobs), education and health services expanding at a 2.2% annualized rate (9,900 jobs), and leisure and hospitality increasing at an annualized rate of 1.7% (6,400 jobs). Sectors that experienced job loss include Information at -1.7% (500 jobs), professional and business services at -1.3% (7,300 jobs), and construction at -0.6% (1,300 jobs).
Net Absorption Rose Sharply in Q2 2025
In Q2 2025, the Houston office market recorded 757,641 sq. ft. of positive net absorption, a significant increase from the 7,960 sq. ft. in Q1 2025. Class A properties contributed 904,947 sq. ft., while Class B properties experienced negative absorption of -147,306 sq. ft., highlighting a growing demand disparity. On a submarket level, The Woodlands and CBD led with 419,095 sq. ft. and 118,190 sq. ft. absorbed, respectively, while submarkets like Greenspoint/North Belt (-56,046 sq. ft.) and Galleria/West Loop (-52,046 sq. ft.) saw notable declines.
Leasing Velocity Increases
Quarterly leasing velocity—comprised of new leases and renewals—rose to 2.7 million sq. ft., up 28.7% from 2.1 million sq. ft. in Q1 2025. Notable leases in early 2025 include Parker Drilling, which signed a 50,544 sq. ft. lease at CityWestPlace 4, Consolidated Asset Management Services, which signed a 50,506 sq. ft. lease at 910 Louisiana, and Industrious, which signed a 25,589 sq. ft. lease at 4 Waterway Square.
Vacancy Rate at 26.2%
The overall vacancy rate in Houston’s office market decreased to 26.2% in Q2 2025, down 30 basis points from 26.5% in Q1 2025 and 70 basis points from 25.9% a year ago in Q2 2024. Class A properties reported a vacancy rate of 27.6%, while Class B stood at 24.2%. Among submarkets, Greenspoint/North Belt and FM 1960/Hwy 249 had the highest vacancy rates at 48.8% and 40.0%, respectively, while Pearland/South and Northeast remained the lowest at 7.6% and 10.9%.
Deliveries and Construction Pipeline Rose Quarterly
New office deliveries in Q2 2025 totaled 123,710 sq. ft., up from 73,000 sq. ft. in Q1 2025, with contributions from Northeast (50,000 sq. ft.), Sugar Land/E Ft Bend (48,000 sq. ft.), and Katy/Grand Pkwy W (25,710 sq. ft.). The construction pipeline rose to 1.4 million sq. ft., up 23.6% from 1.1 million sq. ft. in Q2 2025.
Investment Sales Trends
In the second quarter of 2025, 44 office properties totaling 9.9 million sq. ft. were sold. Total sales volume was $69.3 million, with an average price per square foot of $80 per sq. ft., and an average cap rate of 7.8%. Notable sales in early 2025 included Clarion Partners selling the two-building portfolio known as Westchase Park, totaling 569,825 sq. ft., for a rumored price of $58.95 million or $103 per square foot. The property was 65% leased at the time of sale. Also, Dominus Commercial sold the 806,541 sq. ft., three-building portfolio Brookhollow Central to Hertz Investment Group. The price was not disclosed.
Asking Rates Decrease by 3.5%
Average asking rental rates declined by almost $1.00 per sq. ft. in Q2 2025, with the overall gross asking rent at $28.89 per sq. ft., down 3.5% from $29.93 in Q1 2025 and down 2.8% from $29.72 in Q2 2024. Class A properties averaged $32.95 per sq. ft., while Class B properties averaged $23.04 per sq. ft. Premium submarkets like CBD ($34.71 per sq. ft.) and Greenway Plaza ($33.59 per sq. ft.) continued to command higher rents, though Class B properties in weaker submarkets faced ongoing competitive pressure.
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Steve Triolet
SVP of Research and Market Forecasting
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