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Houston Industrial Commercial Real Estate Quarterly Report Q1 2018 economic data and information - distribution centers

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Houston industrial records 25th consecutive quarter of 5.5% vacancy or lower

EXECUTIVE SUMMARY

Vacancy up slightly as development climbs

Houston’s overall industrial vacancy rate grew slightly to 5.3% in Q1 2018, an increase of 10 basis points quarter-over-quarter, and unchanged year-over-year. Net absorption registered 1.6 million sq. ft. as of the quarter’s end, falling behind the five-year quarterly average of 2.6 million sq. ft. The development pipeline has started to gain momentum at 8.8 million sq. ft., increasing over the last two quarters, after dropping each quarter since Q2 2015, when it reached an all-time recorded high of 15 million sq. ft. under construction. New construction delivered during the first quarter stood at 2.1 million sq. ft.—the same as the average amount of space completed over the last four quarters. Triple net average asking rents dropped marginally by $0.05 per sq. ft. quarter-over-quarter to $6.67 per sq. ft., and down by $0.32 year-over-year to $6.99.

Houston industrial and economic indicators are positive

As the Houston industrial market continues its growing pace, current economic indicators are largely optimistic, suggesting healthy economic output and future growth. Jobs, energy-related activities, and import/export trade have recorded positive results during the first quarter of the year. Houston jobs grew at a convincing annualized pace of 4.7% over the two months ending in February (23,400 jobs), with trade, transportation and utilities having the second largest gains (4,200 jobs). The price of West Texas Intermediate has averaged just under $63 during 2018, and the U.S. rig count was at 993 as of March 30, up 169 rigs, or 20.5%, from 824 the same week in March 2017. In January, $16.9 billion in goods and commodities passed through the Houston/Galveston Customs District, up 8.5% from this time last year. In addition, exports totaled $9.7 billion, up 7.9%, and imports totaled $7.2 billion, up 9.5%.

Houston Industrial Commercial Real Estate Quarterly Report Q1 2018 economic data and information

Houston Industrial Commercial Real Estate Quarterly Report Q1 2018 economic data and information


Broker’s Perspective | Southwest Submarket

While industrial vacancy may have slightly increased citywide during the first quarter of 2018, a newly developed area in Southwest Houston located around Highway 90 and Beltway 8 is steadfastly bucking that trend.

Around 2016, a handful of developers in the Southwest Houston submarket had many in the industrial real estate world scratching their heads in disbelief. Almost simultaneously, these developers delivered roughly 3 million sq. ft. of distribution space all within a three-mile radius. Although these weren’t the first developments of their kind in southwest Houston, this particular submarket had not been historically known for bulk distribution warehouses. To put it into perspective, the deliveries of these projects more than doubled the total square footage of distribution space in that same three-mile radius.

Fast-forward to the present day, and the developers collectively look like Nostradamus: of that 3 million sq. ft. delivered in 2016, less than 300,000 sq. ft. remains vacant. A few of the noteworthy tenants that have decided to call parts of this submarket boom home are Maintenance Supply Headquarters, Pitney Bowes, FedEx, Niagra Bottling, and VWR International.

The risky bet seems to have paid off handsomely for the owners of these industrial parks—so big in fact that Trammel Crow, which owns Park 8Nintey, is getting close to moving forward on Phase 2 of its business park. Additionally, HTX Equities owner of Beltway Southwest Business Park, will be breaking ground on the newest phase of their development as well.

And these aren’t the only new walls set to go up in Southwest Houston: another 1.5 million sq. ft. of distribution product is either in the planning process or currently under construction, with rumblings of even more construction of this same product type expected to be announced in the near future.

It only took two years for the Southwest industrial landscape to undergo this transformation. It will be interesting to see how things progress in the coming years as the greater Houston area continues to become a more highly preferred regional and national distribution hub.

Jake Wilkinson
Vice President
NAI Partners


MARKET OVERVIEW

Booming demand for ecommerce facilities

Industrial inventory in the Houston market area totals 559 million sq. ft., of which 425 million sq. ft. (76%), is Warehouse/Distribution space. The vacancy rate for Warehouse/Distribution product has remained unchanged at 5.2% for the past three quarters, after a drop of 40 basis points from Q2 2017 at 5.6%. The booming demand for ecommerce space has kept vacancy rates tight. Warehouse/Distribution space registered 1.9 million sq. ft. of net absorption during Q1 2018 keeping demand equal with supply, as 2.0 million sq. ft. of new construction was delivered.

Houston Industrial Commercial Real Estate Quarterly Report Q1 2018 economic data and information

Houston #2 in the nation

Due in part to Houston now being recognized as a leading distribution market, Site Selection magazine recently named the Houston region the #2 metro in the nation for new and expanded corporate facilities, totaling 196 businesses. Since 2011, the Houston metro has ranked among the top three metros for corporate relocations and expansions in the nation. Along with population growth, infrastructure, Port Houston, and a dynamic economy, Houston is a primary contender in the race to meet the growing demand for ecommerce facilities.

Houston Industrial Commercial Real Estate Quarterly Report Q1 2018 economic data and information

New supply stimulating increased net absorption

Net absorption for the overall Houston industrial market increased to 1.5 million sq. ft. during the first quarter, almost four times greater than Q4 2017’s 424,000 sq. ft. In addition, the amount of square feet delivered to the market grew to 2.1 million sq. ft., triple the volume quarter-over-quarter. Also influencing the increased amount of net absorption are major move-ins during the first quarter, including 1 million sq. ft. of space taken at Amazon Distribution Center; 143,500 sq. ft. of space occupied by GHX at Generation Park; and 112,000 sq. ft. of space absorbed by Flexo Converters USA at 8575 Volta Drive. Move-outs included Moody’s Compress & Warehouse leaving 605,879 sq. ft. at 4906 Broadway St.; Plastipak Packaging Inc. moving out of 180,000 sq. ft. at 300 S. Sheldon Rd., and FedEx Office Print and Ship vacating 122,500 sq. ft. of space at 5737 Brittmoore Road. Warehouse/Distribution space equaled 1.9 million sq. ft. of net absorption, Flex space was responsible for 44,055 sq. ft., while negative 367,269 sq. ft. of Manufacturing space was reported.

Houston Industrial Commercial Real Estate Quarterly Report Q1 2018 economic data and information

Warehouse/Distribution space requirements continue to drive demand

Of the current 8.8 million sq. ft. under construction in the Houston industrial market, construction starts in the last 12 months represent 6.6 million sq. ft. of that total, with a current overall availability rate of 57%. In the sought-after 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, with a scheduled completion date of June 2018.  On the horizon are the warehouse-style Offices at North Post Oak, a seven-building project at Interstate 10 and the 610 Loop, just northwest of the Memorial area. Over the next several years, Clay Development will build the project on 7.5 acres. The first two properties will be 16,100-sq.-ft. 2-story buildings scheduled to deliver in the first quarter of 2019.

Houston Industrial Commercial Real Estate Quarterly Report Q1 2018 economic data and information

Investment sales activity

Real Capital Analytics data reports the rolling 12-month industrial sales volume as of March 2018 in the Houston area at $289 million, resulting in a -50.1% change versus the prior 12 months. The buyer composition in 2018 is made up of 80% private, 8% public listed/REITs, 7% institutional, and 5% user/other. Top sales transactions in the first quarter for the Houston industrial market include Stag Industrial’s purchase of Brookhollow West Business Park, a 232,950-sq.-ft. industrial complex consisting of two fully leased warehouses located at 7049 and 7140 W. Sam Houston Pky., from AIV; and the St. Paul Fire and Marine Insurance Co. acquisition of Intrepid Business Park at 5737-5747 Brittmoore Road in northwest Houston, a 270,750-sq.-ft. industrial park from Triten Real Estate.

Houston Industrial Commercial Real Estate Quarterly Report Q1 2018 economic data and information

Leasing activity

Leasing activity decreased during the first quarter with a total of 5.0 million sq. ft. leased in the Greater Houston market. This is in comparison to 7.4 million sq. ft. leased during Q4 2017. Top lease transactions that were signed in the first quarter include Unis, LLC taking 257,835 sq. ft. in Bayport South Business Park at 10535 Red Bluff Road; Richardson Steel inking the deal on 138,921 sq. ft. at 2333 Clinton Drive in Galena Park; and Flexo Converters USA signing a 112,000-sq.-ft. lease at 8575 Volta Drive in the North Hardy Toll Road submarket.

Houston Industrial Commercial Real Estate Quarterly Report Q1 2018 economic data and information

Average asking NNN rent dips

The industrial market saw overall average asking rates slide $0.05 per sq. ft. lower quarter-over-quarter to finish at $6.67 per sq. ft. at the end of Q1 2018. The average rate for Flex space is currently at $9.58 per sq. ft.; Manufacturing rates are at $6.10; and Warehouse/Distribution space sits at $6.42.


Leta Wauson
Director of Research
leta.wauson@naipartners.com
tel 713 275 9618

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