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Houston’s average industrial vacancy rate increased 40 basis points quarter-over-quarter to 9.2%, which also represented an increase of 160 basis points year-over-year.


EXECUTIVE SUMMARY

VACANCY RATE INCREASES TO 9.2%
Houston’s average industrial vacancy rate increased 40 basis points quarter-over-quarter to 9.2%, which also represented an increase of 160 basis points year-over-year. At the end of the first quarter, Houston had 57.5 million sq. ft. of vacant industrial space for direct lease and an additional 1.3 million sq. ft. of vacant sublease space. The rise in the vacancy rate is due in part to the record levels of new construction, as a record-breaking 31.8 million sq. was delivered to the market in 2020. Of that total, 11.2 million sq. ft., or 35.1% is available for lease. The vacancy rate for Class A properties is at 18.5%, up from 15.8% this time last year. Total inventory for Class A space represents 120.8 million sq. ft., up from 94.5 million sq. ft. at the end of 2019, a 27.8% increase. First quarter overall net absorption was at 591,000 sq. ft., with 3.5 million sq. ft. delivered during the same time period. The overall monthly average asking triple-net rent is up at $0.63 per sq. ft., compared to this time last year at $0.61, due primarily to the new product delivered to the market.

HOUSTON ECONOMIC INDICATORS
The Federal Reserve Bank of Dallas reported Houston ended 2020 behind the nation in its comeback from the COVID-19-driven job collapse. Last year’s employment data were revised down to show that the area had recovered only about a third of jobs lost during the pandemic downturn versus the previous estimate of nearly half. Oil drilling expanded in the U.S. at its fastest pace since the start of the pandemic amid rising prices and an increasingly optimistic demand outlook. The total number of rigs drilling for oil across the country rose by 13 to end the first quarter to 337, the largest jump since January 2020, according to Baker Hughes. Exploration companies are gaining confidence this year’s 25% run-up in prices is here to stay after the U.S. benchmark crude, West Texas Intermediate, averaged more than $60 a barrel in March—the first calendar month above that threshold since May 2019, reported World Oil Magazine.

Houston Industrial Q1 2021 Graphs


BROKER’S PERSPECTIVE

For many in the Houston Industrial market, the first quarter of 2021 has started off with a shot of encouragement for what the year will bring — both encouragement in the form of increased deal velocity following an overall dismal 2020 and a literal shot (or two) in the arm with vaccinations helping to boost confidence that the worst of the Covid-19 pandemic is well behind us.

Even with the generally optimistic outlook for 2021, initial Q1 market reports indicate new construction in the industrial sector is still marginally outpacing leasing activity with a 9.2% overall vacancy rate—and there seems to be no end to the trend of developers trying to put larger tracts of land on the outskirts of the market into production. Katy, Cypress, Conroe, and Baytown are all still hotbeds of activity with new deliveries on the ground and still more projects in the works. The southwest market is also seeing renewed focus on the heels of successful projects by developers like Hines and Trammel Crow, pushing the boundaries of the submarket to include land sites along 288 and the South Sam Houston Corridor, such as IDV’s South Belt Central Business Park, which is an area of the market that would have garnered little attention in years past when land sites were more prevalent. That said, we do expect more industrial projects to be announced along this  corridor as the year unfolds.

There can be little doubt that under the current market conditions, the distribution sector is ruling the day as manufacturing continues to be slow in the face of an oil and gas market still trying to recover from recent drops in the price of oil. Certainly, a consistent $60.00 per barrel value is one of those “shots” of encouraging news for all Houstonians but we have yet to see it seep its way into the larger blocks of manufacturing space that are peppered throughout the city – these larger blocks of crane-served manufacture space will likely continue to be on the market longer as more and more oil and gas related operators are shedding themselves of excess manufacturing facilities. Distribution is the darling of the market whether its big blocks of space that are upwards of 500,000 sq. ft. or the smaller 20,000 to 50,000-sq.-ft. end-user who is exiting a multi-tenant lease and opting for ownership by purchasing a newly constructed speculative freestanding dock-high distribution building. The latter has become a hot item in the market with companies looking to capture the same features awarded them in larger institutional DC’s but within their own facility where they can build equity rather than continuing to pay rent.

Another trend that has been discussed widely across the market during the first quarter is a surge in the price of steel which has driven the cost of construction up exponentially for new industrial buildings, both metal freestanding and larger tilt-wall projects which rely on steel components as well, such as steel joists and girders. One of the suspected driving reasons for this price jump being discussed is that an unnamed online retailer pre-purchased more than 30% of the steel for their new facilities across the U.S. driving the supply down while steel mills in response aggressively raised prices to take advantage of the shortage, with benchmarks like cold rolled steel coil up approximately 100% in just 90 days.

In conclusion, 2021 is off to a solid start for the Houston Industrial Market, so long as tenants such as Rooms to Go (who in Q1 leased ±498,000 sq. ft. in Katy), Amazon (who in Q1 leased ±347,000 sq. ft. in the Southwest, ±368,000 sq. ft. and ±157,000 sq. ft. in the Northwest, and ±137,000 sq. ft. in the Bay Area) continue to absorb new space and the price of oil consistently stays at $60 per barrel then the rest of 2021 should see nothing but conservative improvement across all industrial market sectors.

Clay Pritchett

Clay Pritchett
Partner
NAI Partners


MARKET OVERVIEW

SUPPLY OUTPACING DEMAND
Supply has outpaced demand for the past three years in the Houston industrial market. The amount of industrial space delivered to the market in Q1 2021 was 3.5 million sq. ft., significantly more than the amount of net absorption at 591,000 sq. ft. With that said, 2020 annual net absorption of 15.7 million sq. ft. is tied for the second highest single-year total since NAI Partners began tracking industrial market data over 20 years ago. Q1 2021 also marked the 47th straight quarter the Houston Industrial market has recorded positive net absorption. For existing buildings, net absorption is the measure of total square feet occupied less the total space vacated over a given period.

CONSTRUCTION
Houston continues to experience record amounts of industrial product under construction with the current volume at 14.4 million sq. ft. On a percentage basis, the Southwest submarket represents 41.6% of all space under construction at 6 million sq. ft. This includes Amazon building a 1 million-sq.-ft. fulfillment center in Missouri City, which is scheduled to open in Q4 2021. The ecommerce giant also announced in June last year that construction had begun on an 850,000 sq. ft. fulfillment center in Richmond due to open in Q2 2021.

WINTER STORM TAKES TOLL ON PORT HOUSTON VOLUMES
Container activity at Port Houston took a hit in February as a deadly ice storm shut port facilities for nearly a week, bringing cargo movements to a virtual standstill. The month’s winter storm and the impact of sub-freezing temperatures on both commerce and activity at Port Houston resulted in a tough month as vessel calls and terminal activities were suspended. Port Houston handled 198,763 twenty-foot equivalent units (TEUs) in February of 2021, compared to February of last year when 255,474 TEUs were handled. That brought container activity for the year to 453,802 TEUs, down 13% compared to the record 524,247 TEUs for the same period in 2020. Although steel volumes were down due to the continued downturn in the oil and gas sector, those volumes are expected to begin to increase. There is hope that tonnage will begin looking better in the months ahead, with energy prices on the rise that may spur an increase in drilling activity and demand for pipe.

INVESTMENT SALES TRENDS
Real Capital Analytics data reports quarterly industrial sales volume for Q1 2021 in the Greater Houston area at $443.3 million. The year-over-year change in quarterly volume is down 70.8% from $1.5 billion in Q1 2020. The primary capital composition for buyers in the first quarter was made up of 54.7% private investors, and 31.6% institutional. For sellers, the majority was 34.9% private investors, and % REIT/listed investors. CenterPoint Properties acquired a rail-served distribution facility in Pasadena from Blackstone Group. Located at 3507 Pasadena Blvd., the facility totals 601,261 sq. ft. and has six rail spurs giving it more rail car storage capacity. The Pasadena facility has a combination of rail service by Union Pacific, BNSF and Kansas City Southern via the Port Terminal Railroad Association.

LEASING ACTIVITY
The volume of signed lease transactions during the first quarter was 8.9 million sq. ft.—down from the previous quarter’s 10 million sq. ft. The largest leases signed in Q1 2021—which is comprised of both new leases and renewals— include Rooms To Go inking a deal for 498,231 sq. ft. at 1006 Jordan Ranch Blvd. in Sugar Land; Amazon signed a deal for 368,467 sq. ft. at 9155 Derrington Road in the Highway290/Tomball Parkway submarket; and 4PX Express USA’s lease for 347,730 sq. ft. at 5880 W. Fuqua Street in the Far Southwest submarket.

AVERAGE ASKING NNN RENT
Monthly rental rates for the entire Houston market on average was $0.63 per sq. ft., as of the end of Q1 2021, unchanged quarter-over-quarter, although up year-over-year from $0.61. The monthly average rate for Flex space is currently at $0.86 per sq. ft.; Manufacturing rates are at $0.54; and Warehouse/Distribution space sits at $0.60. The Southwest ($0.73 PSF) and North ($0.70 PSF) submarkets currently have the highest monthly overall average rate, followed by the Northwest ($0.64). Rental rates may remain elevated, as developers experience rising costs associated with bringing high-quality new projects to the market.


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

Additional NAI Partners Research Reports

Houston Industrial | Monthly Market Report | March 2021
Houston Industrial |  Q4 2020 | Quarterly Report

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