Continued low oil prices have had a marginal impact on Houston’s industrial market. With a reduced pipeline of new projects and strong demand from e-commerce tenants such as Amazon and FedEx, the Houston industrial real estate market is reasonably healthy. The vacancy rate for the metro area rose to 5.7% in Q1 2017, an increase of 40 basis points quarter-over-quarter and 50 basis points year-over-year. In line with broker sentiment, available sublease space for all industrial property types is down 15.8% since Q4 2016. In addition, net absorption stood at positive 1,233,828 sq. ft. as of the quarter’s end—this on the heels of the more than 10.3 million sq. ft. of positive absorption recorded in 2016 (4 million sq. ft. of which Daikin was responsible for). Following a year rife with speculation around the energy market’s recovery and uncertainty over the new presidential administration, Houston’s industrial market is primed for a reprieve in 2017.
Per the U.S. Census Bureau, the Houston metro area reported 125,005 new residents from July 1, 2015, to July 1, 2016, and Houston ranks fifth in the 10 most populous metro areas in the country as of July 1, 2016. As for the Houston job market, the unemployment rate (not seasonally adjusted) ticked up to 5.9% in February, up from 5.7% in January and above 4.8% a year ago. Houston remains above the Texas rate of 5.1% and the U.S. rate of 4.9%. Job growth in Houston increased by 6,200 jobs during the month in February. Government, mainly led by colleges and school districts, had the largest monthly gain of 8,400 jobs. Trade, Transportation, and Utilities had the largest drop, losing 7,800 jobs. The Greater Houston Partnership is forecasting one more soft year in 2017 (albeit with an encouraging job forecast of adding as many as 30,000 new jobs this year), and expects that by 2018 the market should be trending upward.
Houston ended the first quarter of 2017 with positive 1,233,828 sq. ft. of net absorption. Flex space represented negative 639,593 sq. ft. of that total, manufacturing space was responsible for negative 391,838 sq. ft., and warehouse/distribution space closed the quarter with positive 2,265,259 sq. ft.
The Southeast Warehouse/Distribution submarket was almost single-handedly responsible for the overall positive absorption in the Houston industrial market, and remains center stage in the region due to petrochemicals and trade activity. Demand is especially high for properties that have rail-served distribution space near the Port of Houston. In the first quarter of 2017, the Southeast submarket was responsible for 34% of absorption gains and 23% of total leasing activity in Houston. The major move-ins contributing to the quarterly gains include 495,462 sq. ft of space taken by IKEA in Cedar Port Distribution Park; more than 660,000 sq. ft. of space occupied at Ameriport Industrial Park; and 145,376 sq. ft. of space absorbed at Eastport 8 on E. Interstate 10.
Availability and Vacancy
Houston’s industrial availability rate, which measures the total amount of space being marketed for lease, increased by 20 basis points quarter-over-quarter, from 9.3% to 9.5%. By the end of the first quarter, Houston had 51.6 million sq. ft. of available industrial space. Among the major property types, Warehouse/Distribution ended at 9.5% availability, Manufacturing closed at 8.1% availability, and Flex space finished at 12.6% availability. Available sublease space dipped from a peak of almost 5.4 million sq. ft. as of fourth quarter 2016, down to 4.5 million sq. ft. by the close of first quarter 2017. Across all industrial property types, available sublease space was down 15.8% quarter-over-quarter. The North submarket continued to have both the highest overall vacancy and availability rates, at 9.1% and 13.1%, respectively. The higher availability is due in part to an ongoing large supply of institutional warehouse and distribution space at 13.3%. Move-outs affecting net absorption in the North submarket included Ozburn-Hessey Logistics vacating 300,000 sq. ft. at Bayport North Distribution Center in Pasadena and Largo moving out of 200,220 sq. ft. at Clay-Campbell Business Park, in the Northwest submarket.
The industrial market saw overall average asking rates rise $0.11 per sq. ft. quarter-over-quarter to finish at $7.02 per sq. ft. at the end of Q1 2017. Rates for industrial real estate throughout Houston show that the Southwest submarket has the highest prices for industrial space at $8.02. The average rate for Flex space is highest in the Southwest submarket, at $14.33 per sq. ft.; Manufacturing rates peak in the southwest at $6.89; and Warehouse/Distribution space is at its pinnacle in the Northwest at $7.71. The Northwest’s top-tier rental rates are no surprise—the submarket is the traditional core of industrial development, with more than 152 million sq. ft. of the metro’s 538 million sq. ft. of industrial space. Southwest Houston’s vicinity to downtown and the Medical Center is said to be driving demand, as escalated prices may be pushing industrial development to the North and Northwest.
Construction & Deliveries
There is currently about 4.5 million sq. ft. under construction in the Houston industrial market, with about 36% of that space available for lease. The Southeast submarket has the most space in the pipeline at close to 1.5 million sq. ft., including Bayport North Industrial Park Buildings I-1, I-2 and I-3 underway with more than 613,000 sq. ft. and no pre-leased space. The Northwest submarket comes in second with about 1.3 million sq. ft. as Pepperl + Fuchs’ 110,000-sq.-ft. distribution building nears completion at 500 Cane Island Parkway in Katy; and FedEx works towards a completion date of August 2017 for its 800,000-sq.-ft. warehouse at 8787 Grand Parkway in Cypress. During the first quarter of 2017 there were 26 buildings delivered to the Houston industrial market totaling 2.2 million sq. ft., all of which was Warehouse/Distribution except for 100,000 sq. ft. of flex R&D space at Dow Chemical in Lake Jackson.
Overall leasing activity was down quarter-over-quarter at almost 3.5 million sq. ft. during Q1 2017 from 5.0 million sq. ft., and year-over-year from 6.7 million sq. ft. The average sq. ft. leased per quarter during the last ten years is approximately 6.1 million sq. ft. Notable tenants that signed lease agreements this year include Gulf Winds, with a 303,281-sq.-ft. renewal at Greens Port Industrial in the Northeast submarket; Ford Motor Company, taking 250,000 sq. ft. at Alamo Crossing Center in the Northwest; and Exel renewing 167,753 sq. ft. of space at Citypark East Industrial in the Energy Corridor.