Vacancy remains low with existing space scarce
The overall industrial vacancy rate stood at 5.4% at the end of Q4 2017, an increase of 10 basis points quarter-over-quarter and an increase of 20 basis points year-over-year. Net absorption finished the quarter at positive 147,952 sq. ft., significantly down from positive 3.5 million sq. ft. as of the third quarter’s end, and totaling 6.8 million sq. ft. for the full year. Triple net asking rents remained steady, down $0.04 per sq. ft. quarter-over-quarter to close Q4 at $6.71; with a decrease of $0.21 per sq. ft. year-over-year—although concessions such as free rent and tenant improvement allowances make posted rents less meaningful as a market indicator. Houston’s leasing activity rose to 5.5 million sq. ft., up from the previous quarter’s 5.0 million sq. ft., and not far from 5.6 million sq. ft. a year ago. Current construction activity remains controlled at 6.0 million sq. ft., up from this time last quarter at 4.9 million sq. ft., while the amount of square feet delivered to the market in the fourth quarter decreased to 705,196 sq. ft., compared to 2.6 million sq. ft. at the end of the third quarter.
Outlook for Houston remains positive
The Houston economy continued to improve nearing the end of 2017. The business-cycle index is trending upwards and employment data exceeded pre-hurricane readings. Houston’s unadjusted unemployment rate was 4.3% in November, up from 4.1% in October. The November increase was driven in part by an increase in the labor force likely related to Hurricane Harvey. Metro Houston created 15,700 jobs in November, according to the Texas Workforce Commission, slightly above the 25-year average of 11,700 jobs for the month. Transportation, warehousing and utilities grew by 2,600 jobs, the largest November job gain for the sector since 1990, the earliest data available. The rise of online retailers such as Amazon, has increased demand for workers to package and deliver goods. Amazon has opened five Houston-area facilities totaling more than 1.3 million sq. ft. since 2014. Overall, while the outlook for the immediate future is cautious, forecasts for the next few years remain optimistic.
Most statistical data points for the industrial market moved in a positive direction or at a minimum stabilized by the end of the fourth quarter. I believe this sets the table for the Houston industrial market to have an outstanding 2018, due in part to the demand for Manufacturing space continuing to increase alongside the already thriving distribution market.
Additionally, there is a healthy amount of speculative construction underway combined with increased build-to-suit activity to meet tenant demand in 2018. The Southeast and Northwest continue to be the submarket darlings of the industrial sector due to each segment’s performance and rental rate growth. The lack of quality land sites available in these core submarkets constrains the amount of speculative development that can take place.
Ultimately, the resiliency of our industrial market now coupled with pro-business national policies should make for a very successful and exciting 2018 for Houston’s industrial market.
Vacancy rate at or below 5.5% for 24 consecutive quarters
Houston’s overall vacancy rate stood at 5.4% for Q4 2017, an increase of 10 basis points quarter-over-quarter and an increase of 20 basis points year-over-year. The overall availability rate, which measures the total amount of space being marketed for lease, dropped 20 basis points to 9.0% as of the fourth quarter 2017. Among the major property types, Warehouse/Distribution ended at 5.4% vacancy, Manufacturing closed at 2.9%, and Flex space finished at 10.0%. The overall vacancy rate for Houston industrial space has remained at or below 5.5% for 24 consecutive quarters, beginning with Q1 2012.
Limited new supply contributes to driving net absorption down
Net absorption for the overall Houston industrial market dropped to positive 147,952 sq. ft. during the fourth quarter while the amount of square feet delivered to the market dwindled to 705,196 sq. ft. compared to 2.6 million sq. ft. at the end of the third quarter. The amount of square feet delivered to the market in the fourth quarter is the lowest quarterly total since Q4 2011 at 626,253 sq. ft. Also impacting minimal net absorption are major move-outs including Randall’s leaving 700,644 sq. ft. of distribution space at 10700 Telge Road; Pacorini Metals and Exel responsible for portions of 307,500 sq. ft. of sublease space on the market in Cedar Crossing Business Park; and RR Donnelley & Sons emptying 201,600 sq. ft. of space in West by Northwest Business Park. Sizeable move-ins during the fourth quarter include 415,272 sq. ft. of space taken by MRC Global in Port Crossing Commerce Center in LaPorte; 181,540 sq. ft. of space occupied by Starplast in Point North Cargo Park in Humble.; and 160,520 sq. ft. of space absorbed in Ameriport Industrial Park in Baytown.
Warehouse/Distribution space requirements pushing demand
Of the current 6.0 million sq. ft. under construction in the Houston industrial market, construction starts in 2017 represented 3.8 million sq. ft. of that total, with a current overall availability rate of 70%. In the coveted Northwest submarket, the two largest speculative projects underway are 525 Cane Island Parkway in West Ten Business Park, a 673,785-sq.-ft. distribution center in Katy that broke ground in late September, with plans to deliver in July 2018; and Northwest Logistics Center, a 411,442-sq.-ft. distribution center located at 6751 N. Eldridge Parkway on a 26-acre site just south of Hwy. 290 and west of Beltway 8, with a scheduled completion date of June 2018. Considering the shortage of bulk distribution space available for lease, and the ever-growing demand from retailers for Warehouse/Distribution space, both projects are awaiting pre-leasing activity.
Average asking NNN rent remains steady
The industrial market saw overall average asking rates slide $0.04 per sq. ft. lower quarter-over-quarter to finish at $6.71 per sq. ft. at the end of Q4 2017. The average rate for Flex space is currently at $9.26 per sq. ft.; Manufacturing rates are at $6.09; and Warehouse/Distribution space sits at $6.51. Total industrial inventory followed in the Houston market area amounted to 550 million sq. ft. in 11,400 buildings. The Flex sector consisted of 48 million sq. ft. (9%); Manufacturing made up 85 million sq. ft. (15%); and Warehouse/Distribution space accounted for 417 million sq. ft. (76%). In addition, within the industrial market are 3,000 owner-occupied buildings representing 169 million sq. ft.
Strong investment sales and leasing activity
Real Capital Analytics data reports the rolling 12-month industrial sales volume as of December 2017 in the Houston area at $1.497 billion, resulting in a 102.1% change versus the prior 12 months. The buyer composition in 2017 was made up of 40% private, 25% institutional, 16% public listed/REITs, 12% cross-border, and 7% user/other. Top sales transactions in December for the Houston industrial market include Duke Realty’s purchase of Bayport North Distribution Center II, a 772,500-sq.-ft., 2-building portfolio from Mountain West; and the Rodney George acquisition of 9835 Genard Road in northwest Houston, a 485,832-sq.-ft. distribution/warehouse from First Industrial Realty Trust, with tenant Emser Tile awaiting completion of their 600,000-sq.-ft. build-to-suit in Pinto Business Park in north Houston.
Leasing activity increased during the fourth quarter with a total of 5.5 million sq. ft. leased in the Greater Houston market. This is in comparison to 5.0 million sq. ft. leased throughout Q3 2017. Warehouse/Distribution space dominated at 4.8 million sq. ft. or 87%, followed by Flex space fulfilling 505,000 sq. ft., and Manufacturing space satisfying 209,000 sq. ft. Top lease transactions that were signed in the fourth quarter include Rooms To Go taking 373,860 sq. ft. in Mason Park at 2244 N. Mason in Katy; NFI inking the deal on 244,550 sq. ft. in Greenspoint Business Center at 121 Esplanade Blvd.; and Palmer Logistics signing a 231,875 sq. ft. lease in Bayport North Industrial Park in Pasadena.
Keeping an eye on crude and rig count
West Texas Intermediate traded between $55.79 and $60.46 per barrel in December 2017 compared to $49.85 and $54.01 in December 2016. The U.S. Energy Information Administration recently said it expects crude prices to average $54.01 a barrel in the first quarter of 2018, up from its previous forecast of $51.79 a barrel. In the fourth quarter, it said, prices could average $57.31 a barrel, up from its last projection of $54.95 a barrel. Baker Hughes reported the average U.S. rig count for December 2017 was 930, up 19 from the 911 counted in November 2017, and up 296 from the 634 counted in December 2016. The rig count peaked at 958 in late July, then briefly declined, but has trended upward since early November.
Director of Research
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