Industrial market in good shape due in part to e-commerce demand
Falling oil prices have had varied effects on the different property types in the Houston industrial market. Currently, the most robust sector is Warehouse/Distribution space, underscoring the vigorous demand from e-commerce tenants such as Amazon and FedEx. Overall industrial vacancy rose to 5.5% in Q2 2017, an increase of 20 basis points quarter-over-quarter and year-over-year. Total available sublease space continued to drop in the second quarter, down 20% since year-end 2016. In addition, net absorption stood at positive 10,312 sq. ft. as of the quarter’s end, with a total of 3.0 million sq. ft. of positive absorption recorded thus far during 2017. The construction pipeline has slowed down, as developers seem to have learned their lessons from the 1980s and avoided overbuilding, while continuing to keep an eye out for available land sites in anticipation of new projects to keep up with future demand. The asking rent for all sectors dropped 2.1% from Q1 2017 to $6.84 per sq. ft. at the end of the second quarter as pressure from the continued low oil prices continue to influence rates.
Economy continues to grow
Overall, the outlook for Houston is hopeful. May data was varied for the Houston metro area. The business-cycle index continued to indicate a modest expansion. Labor market data suggested job growth, improvement in the energy sector, and low fuel prices helped consumers. Houston’s unemployment rate was 5.1% in May, down from 5.4% in April and below its year-to-date average of 5.5%. Other positive indicators are the Houston Purchasing Managers Index, which registered at 54.1 in May, signaling economic expansion in metro Houston for the eighth consecutive month; and the closely followed Baker Hughes U.S. Rig Count, which rose for the 23rd straight week totaling 941 rigs. Conversely, increasing costs and moderate oil prices may soften the course of the rig count. The recent forecast by the Energy Information Administration estimated oil (WTI) will average $51 in 2017 and $55 in 2018, while market experts state the industry needs $60 to $65 per barrel oil for sustained growth and success.
Houston’s industrial market saw stable but continued growth throughout the second quarter, recording overall positive net absorption for the 58th consecutive quarter. With the majority of activity being driven by online retailers, it’s clear that the phrase “e-commerce” is no longer a buzzword, it’s a movement. Of the nearly dozen big-box distribution deals greater than 500,000 sq. ft. currently looking for space in the Houston market, most are being driven by e-commerce needs, with a core requirement being as close in proximity to UPS and FedEx shipping hubs as possible.
Continued demand for larger distribution facilities and a lack of developable industrial sites close to shipping hubs is making counties like Waller County create incentive packages to attract developers, which is also resulting in population growth. End-user consumer-driven distribution and third-party logistics companies are driving construction projects in other submarkets, notably the North and Northwest. Additionally, despite diminishing hopes of oil reaching $60/barrel by the end of the year, the plastics and petrochemical industries are still playing major roles in new construction projects in the Southeast, which has and will continue to remain one of Houston’s healthiest submarkets.
With regards to absorption, although the second quarter only saw ±10,318 sq. ft. of positive absorption, it’s important to take note of the fact that there were nearly 5 million sq. ft. of new leases signed during the second quarter. It is expected that roughly 3.4 million sq. ft. of those lease agreements signed won’t start occupying until mid-2018, and so the absorption of that space won’t be reflected by market statistics until sometime next year.
Vacancy edges up
Overall vacant space rose to 5.5%, an increase of 20 basis points from the 5.3% rate recorded at the end of the previous quarter. The vacancy rate has remained at or below 5.5% since Q1 2012, averaging 5.0% during the same time period. Among the major property types, Warehouse/Distribution ended at 5.6% vacancy, Manufacturing closed at 2.8% vacancy, and Flex space finished at 9.9% vacancy. Of the 5.0 million sq. ft. of new supply delivered during 2017, 1.9 million sq. ft. is vacant Warehouse/Distribution space.
Flat net absorption with healthy future commitments
During the second quarter, about 2.3 million sq. ft. of space was moved out of, and 2.3 million sq. ft. was moved in to, resulting in positive net absorption of 10,318 sq. ft. Also during the second quarter, 4.9 million sq. ft. of new leases were signed. While one tenant’s move-in and move-out may happen at the same time, another tenant may move in or out on different dates. This past quarter, 3.4 million sq. ft. of new lease agreements were signed with move dates scheduled in the third quarter of 2017 or later, indicating a healthy amount of committed future absorption. Another good indicator is the 4.4 million sq. ft. under construction with only 1.25 million sq. ft. of that space available, representing a healthy amount of build-to-suit industrial space being built. The major move-ins contributing to net absorption include 340,503 sq. ft. of space taken by Bel Furniture in West Ten Distribution Center; 160,000 sq. ft. of space occupied by McLane Group Int’l at Interstate Commerce Center; and 140,000 sq. ft. of space absorbed by Staples at Alamo Crossing Commerce. The major move-outs involve Foxconn Technology Group vacating 245,094 sq. ft. of space at Centre at Cypress Creek; 125,120 sq. ft. left by Kuehne & Nagel at World Houston Business Center; and 102,680 sq. ft. emptied at 4849 Homestead Road in Northway Park II.
Demand for Warehouse space dominating
There is currently 4.3 million sq. ft. under construction in the Houston industrial market, with only one-fourth of that space available for lease. Port-and-rail-oriented developments in the Southeast submarket are a good indicator of Houston’s diversified economy. A testament to those developments is the recent 500,000-sq.-ft. rail-served distribution facility for Vinmar International, a Houston-based petrochemical marketing and distribution company. The acquisition of 40 acres in the TGS Cedar Port Industrial Park near Baytown was prompted in part by the expanded Panama Canal. The expansion was completed in June 2016 allowing for larger ships and more cargo containers to pass through the canal. Many additional industrial and distribution projects have been completed at Cedar Port, including IKEA’s 1.0 million-sq.-ft. distribution facility. To meet the current market demand for rail-served sites, Phase III at Cedar Port Industrial Park is delivering a 3,000-acre tract to provide for bulk distribution and manufacturing. There has been more than 5.0 million sq. ft. of industrial buildings completed in Houston in 2017—4.7 million sq. ft., or 94% of that total, is Warehouse/Distribution space. The Southeast submarket has the most space in the pipeline at close to 1.7 million sq. ft., while the Northwest submarket comes in second with 1.2 million sq. ft.
Mega manufacturing facility opens
The new $417 million, 497-acre state-of-the-art Daikin Texas Technology Park consists of 23 million sq. ft. of space under one roof including the three-mile perimeter around the entire facility. The park is the largest tilt-wall structure in the U.S., and the second-largest manufacturing facility in the U.S. The workforce should hit the 5,000-plus mark between 2017 and 2018, with the rumored number of employees reaching up to 6,000. Waller, the location of the plant, is home to 2,400 residents. Local businesses have reported increased sales because of DTTP employees.
As the rate of leasing activity has remained steady during 2017, a total of 5.2 million sq. ft. of transactions occurred in the overall Houston market during the second quarter. Significant tenants that signed lease agreements include Bel Furniture, with 340,503 sq. ft. at West Ten Distribution Center; Dupuy Group, with 212,961 sq. ft. at 3240 South Loop E.; and VWR Int’l taking 125,251 sq. ft. of space at 521 Highway 90A in southwest Houston. Japanese chemical giant Kuraray America, signed a long-term lease for 465,851 sq. ft. in two, new build-to-suits, with a move date scheduled for January 2018. Kuraray is the first tenant in the new 185-acre Bayport Logistics Park, in Pasadena, near the Port of Houston.
Average asking NNN rent remains relatively steady
The industrial market saw overall average asking rates drop $0.15 per sq. ft. quarter-over-quarter to finish at $6.84 per sq. ft. at the end of Q2 2017. Rates for industrial real estate throughout Houston show that the Southwest submarket has the highest prices for industrial space at $7.38. The average rate for Flex space is currently highest in the CBD submarket, at $15.35 per sq. ft.; Manufacturing rates peak in the Northwest at $7.01; and Warehouse/Distribution space is at its highpoint in the North at $7.20. The North and Northwest’s top-tier rental rates are no surprise—the submarkets are the traditional core of industrial development, comprising 247 million sq. ft., almost half of the metro’s 543 million sq. ft. of industrial space.