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Houston’s average industrial vacancy rate increased 100 basis points quarter-over-quarter to 7.8%, which also represented an increase of 180 basis points year-over-year. At the end of the first quarter, Houston had 45.5 million sq. ft. of vacant industrial space for direct lease and an additional 2.2 million sq. ft. of vacant sublease space.


EXECUTIVE SUMMARY

 

Vacancy rates see increase

Houston’s average industrial vacancy rate increased 100 basis points quarter-over-quarter to 7.8%, which also represented an increase of 180 basis points year-over year. At the end of the first quarter, Houston had 45.5 million sq. ft. of vacant industrial space for direct lease and an additional 2.2 million sq. ft. of vacant sublease space. With overall vacancy at 47.7 million sq. ft., positive quarterly absorption of 3.2 million sq. ft.— up 37.4% compared to Q4 2019—is welcomed. The record-breaking levels of new construction have been one contribution to driving the vacancy rate up, as there has been 6.9 million sq. ft. of available space delivered to the market so far in 2020—about 65% of the total 10.0 million sq. ft. completed. The vacancy rate for Class A properties is at 16.7%, up from 10.1% this time last year. The overall monthly average asking triple-net rent has remained consistent at its current rate of $0.62 per sq. ft., up $0.01 quarter-over-quarter and year-over-year.

 

Houston economic indicators

Houston started 2020 with healthy job gains—led by leisure and hospitality, and health industries. Service-providing industries were accelerating, while goods-producing sectors had slight contractions, with modest to no growth in manufacturing. However, oil and stock markets have been whirling from the impacts of COVID-19 on world economies and a flood of crude from OPEC. As noted in NAI Partners’ Houston Industrial Market QuickTake, these factors have cast a weighty shadow over the outlook for the region. On a year-over-year basis, Houston grew 2.3% (71,100 jobs). Houston’s unemployment rate was flat at 3.8% in February. For comparison, the February unemployment rate was 3.5% in Texas and 3.5% in the U.S. This data precedes the coronavirus (COVID-19) outbreak in the U.S.


MARKET OVERVIEW

 

COVID-19 impact and long-term effects of oil price war

Houston’s industrial market was no doubt the metro’s best-performing property sector recently and seemed relatively unaffected by the recent oil downturn in 2014/2015. As the population in Houston and surrounding areas flourished, so did the demand to distribute goods. The previous relatively steady price of oil combined with the population growth made the Houston area a very desirable market for industrial developers, resulting in record levels of completed construction. However, Houston’s industrial market faces headwinds amid the ongoing pandemic and oil price war.

 

New supply continues to outpace demand

Supply has outpaced demand since Q1 2018 in the Houston industrial market. The amount of industrial space delivered to the market during Q1 2020 was 10.0 million sq. ft., more than three times the amount of net absorption at 3.2 million sq. ft. For existing buildings, net absorption is the measure of total square feet occupied less the total space vacated over a given period.

 

Construction

Houston has experienced record-breaking amounts of industrial product under construction with the current amount at 18.1 million sq. ft. Even prior to the coronavirus pandemic and the oil price war, there were discussions around whether Houston’s industrial market risked becoming overbuilt. The coronavirus pandemic may lead to project delays or a slowdown in groundbreakings over the next few months, as owners, lenders, and developers come to terms with the changing economic environment both locally and nationally.

 

Port Houston is open for business

Port Houston is part of a critical infrastructure industry as identified by the Department of Homeland Security and continues to operate to keep the supply chain moving and keep commerce flowing to support our region and the nation. Container activity at Port Houston, the largest container port on the United States Gulf Coast, began slowing in late March as expected as the coronavirus outbreak continued to threaten countries across the globe, including the U.S. Port Houston handled a total of 248,280 twenty-foot-equivalent units (TEUs) in March, a drop of 11% compared to March of 2019, when 280,721 TEUs were recorded. For the full year, Port Houston handled 773,087 TEUs through March, compared to 694,167 TEUs for the same period last year. That is an increase of 11% for the first quarter. The latest data from PIERS shows that while the U.S. container trade overall has contracted by more than 5% year- to- date, Port Houston has expanded by a similar amount. Nevertheless, in March Port Houston saw a total of seven sailings canceled by the carrier.

 

Investment Sale Trends

Real Capital Analytics data reports quarterly industrial sales volume for Q1 2020 in the Greater Houston area at $1.2 billion, compared to first quarter 2019 at $358 million. The primary capital composition for buyers in the first quarter was made up of 77.3% REIT/listed, and 11.5% private. For sellers, the majority was 56.7% REIT/ listed, and 27.8% private investors. In April, Invest LP acquired a two-building industrial property totaling 100,000 sq. ft. at 8201 and 8211 La Porte Freeway from Duma Land LLC for an undisclosed amount. The sale was for a combined 43,000 sq. ft. of office space, 2.3 acres of stabilized yard, 14 dock-high doors, three ramps, and one recessed dock with cross-dock capabilities.

 

Rent

Houston’s industrial market vacancy rate sits at 7.8% as of Q1 2020. With additional space likely coming available in Houston, larger industrial tenants will arguably have more leverage than at any time in the last decade with regards to negotiating rental rates, terms, tenant improvements and concessions. Disruptions from COVID-19 will also have an impact on commercial real estate landlords and tenants as difficult decisions are made to adapt to these sudden changes. Many small tenants—particularly retail tenants—have seen revenue drop 50% to 100% in some cases and simply can’t pay their rent. For companies that qualify, the CARES Act recently passed by Congress provides at least two months’ rent and wage relief for companies of 500 employees or less; landlords—many of which are also struggling, as they receive multiple rent relief requests while still having to pay property expenses and mortgage payments—expect tenants who are able to do so to apply for these funds in order to pay rent.


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

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