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Houston Industrial market records highest quarterly leasing total of all time.


EXECUTIVE SUMMARY

VACANCY RATE DECREASES TO 9.0% Houston’s average industrial vacancy rate decreased 10 basis points quarter-over-quarter to 9.0%. At the end of the second quarter, Houston had 56.6 million sq. ft. of vacant industrial space for direct lease and an additional 1.6 million sq. ft. of vacant sublease space. The vacancy rate for Class A properties is at 17.9%, down from 18.3% this time last quarter. Total inventory for Class A space represents 123 million sq. ft., up from 108 million sq. ft. as of Q2 2020, a 13.8% increase. The drop in the vacancy rate is due in part to the record-breaking level of leasing activity in Q2 2012 at 12.5 million sq. ft. Second quarter overall net absorption was at 3.4 million sq. ft., with 3.1 million sq. ft. delivered during the same time period. The overall monthly average asking triple-net rent is up at $0.64 per sq. ft., compared to this time last year at $0.63, due primarily to the new product delivered to the market.

HOUSTON ECONOMIC INDICATORS The Federal Reserve Bank of Dallas reported the most recent data show continued economic recovery in Houston. In April, payrolls and the labor force increased, unemployment was down, and the burden of COVID on the region continued to recede. Overall, the outlook remains positive. Houston’s unemployment rate fell from 8.1% in February to 7.6% in April. This occurred amid an increase in the labor force of 44,500—the largest two-month gain since June 2020. The number of drilling rigs operating in the U.S. nudged up the week ending July 9, 2021 as oil approached $75. West Texas Intermediate settled at $74.56/barrel, and drillers added four rigs, raising the nation’s count to 479, according to oil-field services firm Baker Hughes and research firm Enverus. A year ago, there were 258 rigs in operation as the global pandemic slashed crude demand.


MARKET OVERVIEW

12 STRAIGHT YEARS OF POSITIVE NET ABSORPTION For the first time in over three years, demand outpaced supply, if only marginally, in the Houston industrial market. The net amount of industrial space absorbed in Q2 2021 was 3.4 million sq. ft., outpacing the 3.1 million sq. ft. delivered. With that said, 2021 year-to-date net absorption of 4.0 million sq. ft. is behind year-to-date square feet delivered at 6.6 million sq. ft. Q2 2021 also marked 12 years, equal to 48 straight quarters, the Houston Industrial market recorded overall positive net absorption. Houston ranked sixth in the nation for net absorption, the difference between move-ins and move-outs, over the past four quarters, according to Costar.

RECORD-BREAKING LEASING ACTIVITY The volume of signed lease transactions during the second quarter was a record-breaking 12.5 million sq. ft.—up from the previous quarter’s 9.7 million sq. ft., registering a massive 22.2 million sq. feet of transactions in the first half of 2021. Houston industrial volume was up almost 50% through the first six months of 2021 compared with the same period last year. The largest leases in the second quarter include: Ferguson for 750,775 sq. ft. at the Empire West Business Park in June; Living Spaces Furniture Co. for 685,000 sq. ft. at the Air 59 Logistics Center in Humble in June; WebstaurantStore for 645,000 sq. ft. at 4725 E. Grand Parkway S. in Baytown in May; FedEx for 535,000 sq. ft. at 505 Aldine Bender Road in North Outer Loop in April; and Custom Goods for 353,600 sq. ft. at Bay Area Business Park 05 in Pasadena and 347,983 sq. ft. at the Bayport South Business Park in Pasadena, both in June.

CONSTRUCTION Houston continues to experience record amounts of industrial product under construction with the current volume at 15.1 million sq. ft., and almost 70% of that space has already been spoken for. On a percentage basis, the Southwest submarket represents 40% 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 that construction had begun on an 850,000-sq.-ft. fulfillment center in Richmond due to open in Q3 2021. In addition, there are plans to break ground soon on a 2.3 million-sq.-ft. expansion on the recently completed Empire Business Park in Brookshire. Phase two of the 300-acre industrial development is scheduled to begin in Q3 2021.

PORT HOUSTON RECORDS DOUBLE-DIGIT TEU INCREASES Twenty-foot equivalent units (TEUs) in May showed a 30% increase, with 288,127 TEUs compared to last year for the same month. In addition, year-to-date, Port Houston container terminals have recorded an increase of 8% over last year. This comes after a record-breaking 2020 for TEUs through Port Houston, surpassing the 3 million TEU mark for the first time. General cargo also saw gains in May, with steel imports, auto imports, and bagged goods imports up compared to this time last year. Notably, commodities like lumber, machinery, plywood, and bagged foods increased, indicating a comeback of industries hard hit by the pandemic. Continued growth in cargo into Port Houston is expected.

INVESTMENT SALES TRENDS Real Capital Analytics data reports quarterly industrial sales volume for Q2 2021 in the Greater Houston area at $951 million, more than four times the amount in Q2 2020 at $223 million. The primary capital composition for buyers in the second quarter was made up of 55.2% private investors, and 30.4% institutional. For sellers, the majority was 46.4% private investors, and 26.7% institutional. A recent significant transaction, Lexington Realty Trust acquired a 738,701 sq. ft. Port of Houston fully leased Class A industrial portfolio from Triten Real Estate Partners. The 44.6-acre portfolio consists of three newly constructed buildings: Bayport North Logistics Center I in Pasadena; Bayport North Logistics Center II in Pasadena; and Underwood Port Logistics Center in Deer Park.

AVERAGE ASKING NNN RENT The average monthly rental rate for the entire Houston market was $0.64 per sq. ft. as of the end of Q2 2021, up slightly quarter-over-quarter and year-over-year from $0.63. The monthly average rate for Flex space is currently at $0.86 per sq. ft.; Manufacturing rates are at $0.51; and Warehouse/Distribution space sits at $0.62. The Southwest ($0.77 PSF) and North ($0.69 PSF) submarkets currently have the highest monthly overall average rate, followed by the Northwest ($0.66). 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 |  Q1 2021 | Quarterly Report
Houston Industrial | Monthly Market Report | March 2021
Houston Industrial |  Q4 2020 | Quarterly Report

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