Data InSight


 

Strength of Houston’s Rail-Served Industrial Market Continues to Defy Oil Downturn with Balanced Supply and Demand

 

January 2017 I Vol. 3, ISSUE 1 I Download PDF

 

Executive Summary

Vacancy is a key metric in commercial real estate which reflects shifts in supply and demand by measuring changes in net absorption, new deliveries, and existing inventory. Houston’s overall industrial vacancy is 5.7%, below its historic 95% confidence interval of 6.1% to 6.8%. Industrial products are diverse, however. Some industrial products such as crane-served buildings have softened with the oil market, while others such as rail-served building have maintained their strength. Here, we examine the historical shifts and contemporary trends in the supply and demand of rail-served industrial buildings.

Overall, we have seen rail-served industrial buildings shift from high vacancies of 15% to 17% during 2002 - 2004 to a much more balanced supply and demand with vacancies fluctuating from 2% to 5% in recent years (Figure 1). Specifically, from 2000-2003, vacancy of rail-served buildings climbed to historic highs of greater than 17%, with little to no new construction and consistently negative net absorption until 2004 (Figure 1). Then, from 2004-2008 Houston saw new construction, deliveries, and net absorption of rail-served buildings spike with a new emphasis on the Southeast submarket. Resulting from a variety of factors including among others the growth of the plastics industry in the southeast and expansion of the Bayport Container Terminal of the Port of Houston, this spike increased the balance between supply and demand, leading vacancies to drop and fluctuate between 6% and 9% from 2006 -2011. Most recently, from 2011 through 2016, Houston’s rail-served buildings have seen ever greater tightening in their supply and demand, leading vacancies to further drop and fluctuate from 2% to 4.5% in the past couple of years. The future is always hard to forecast, but it is almost certain that new construction has to increase to meet the growing demand for rail-served buildings, which has been primarily concentrated in the Southeast submarket.

Figure 1


Motivation

Vacancy is a key metric in commercial real estate, a composite variable that measures changes in supply through new construction, demand through net absorption, and existing stock inventory. Vacancy is empty space in sq. ft. of stock inventory of rentable building area (RBA) that is not occupied by a tenant, whether or not that space has a lease obligation. When expressed as a percentage, vacant square footage is divided by total square footage of stock inventory to produce a percent of market that is vacant and not occupied.

For Houston’s industrial market as a whole, vacancy is currently 5.7%, below the historic average of 6.4% and the 95% confidence interval of 6.1% to 6.8%. This suggests that the industrial market as a whole is within its normal bounds of performance. Yet, industrial buildings are diverse, ranging broadly from manufacturing, warehouse/distribution, and flex buildings to specific products such as crane-served buildings or rail-served buildings. While some industrial products in Houston have softened substantially with the oil market, others have maintained their strength. Crane-served buildings have softened substantially, with a current 10% vacancy that is well above its historic average of 7.9% and the 95% confidence interval of 7.3 - 8.6%. On the other hand, the rail-served market appears to have maintained its strength throughout the oil downturn, with vacancies holding steady during the past year at 4.5%.

Here, we examine the historical shifts and contemporary trends in the supply and demand of rail-served industrial buildings. Figure 1 shows past and current trends in vacancy given net absorption and deliveries, while Figures 2, 3 and 4 individually examine net absorption, new construction and deliveries, and vacancy, respectively. In sum, Houston’s rail-served industrial buildings have shifted from high vacancies of 15% to 17% prior to 2004 to a much more balanced supply and demand with vacancies fluctuating from 2% to 5% over past couple of years.

Figure 2

Net Absorption

Net absorption measures demand for commercial real estate through the change in occupied inventory, including direct and sublease space. Figure 2 shows net absorption of rail-served buildings in Houston by quarter per year from 2000 through 2016. Historically from 2000 through 2003, rail-served buildings saw little demand with negative net absorption ranging from -500,000 to -1,000,000 sq. ft. However, demand increased substantially from 2004-2008 with annual positive net absorptions typically exceeding 1.0 million sq. ft. (ranging from 500,000 sq. ft. to nearly 3.0 million sq. ft.). Net absorption did decline again in 2009 and 2010, but demand has steadily increased since then though remained relatively flat in 2016. Unlike crane-served buildings, demand for rail-served buildings has been largely positive during the recent oil downturn that began in 2014.

Figure 3

New Deliveries and Construction

Supply of new commercial real estate is determined by existing stock inventory plus deliveries of new construction minus any demolition of older buildings. Buildings under construction contribute to the pipeline of new deliveries and can help gauge how supply will grow in coming quarters and years. Figure 3 shows new supply of rail-served buildings in Houston from 2000-2016. New supply through construction and deliveries remained relatively low from 2000-2003, but then from 2004-2008 new construction and deliveries increased dramatically. This push in construction was likely spurred by one or more of numerous factors, including the increased production and export of plastics from the Port of Houston; increased demand for and construction of rail-served buildings in the Southeast market, with the North and Northwest submarkets being overbuilt; expansion of the Bayport Container Terminal of the Port of Houston; and among others, low land values and interest rates priming construction.

 ‚ÄčFigure 3

Vacancy

Figure 4 shows vacancy of rail-served buildings from 2000 to 2016 on a quarterly basis. Vacancy tracks major trends in supply and demand by measuring changes in net absorption (Figure 2) and new deliveries and construction (Figure 3). With the negative net absorptions recorded from 2000-2003 (Figure 2), coupled with the new construction and deliveries (Figure 3), vacancies increased from 11.5% in 2000 to 17.4% in 2003 (Figure 4). Then, with new construction and renewed demand, vacancies decreased from 17% in 2003 to 5.8% in 2009. Demand waned a little bit from 2009-2010 and vacancies increased again to 9.6% in 2011, but have been falling ever since to their current steady levels of 4.5%. It is almost certain that construction of rail-served buildings has to increase to meet growing demand, particularly with all the new plastics products coming online in the Southeast submarket.


Methodology

Commercial real estate data on industrial space were obtained from CoStar in early January 2017. The statistical analyses and data visualization were performed using the R software and programming language:

R Core Team (2014). R: A language and environment for statistical computing. R Foundation for Statistical Computing, Vienna, Austria. URL http://www.R-project.org/.


J. Nathaniel Holland, Ph.D., Chief Research and Data Scientist

Dr. J. Nathaniel Holland is a research scientist with 20 years of experience in using the scientific method to extract information from complex multi-dimensional data. He joined NAI Partners in 2014 as Chief Research and Data Scientist. At NAI Partners, Nat leverages his sharp intellectual curiosity with his skills in statistical modeling to guide data-driven business decisions in commercial real estate. Like many data scientists in the private sector, Nat joined NAI Partners following a career in academia. Prior to taking up data analytics at NAI Partners, he held professorial and research positions at Rice University, University of Houston, and the University of Arizona between the years of 2001 and 2014. Nat is the author of more than 50 scientific publications, and he has been an invited expert speaker for more than 60 presentations. Trained as a quantitative ecologist, he holds a Ph.D. from the University of Miami, a M.S. from the University of Georgia, and a B.S. from Ferrum College.