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Despite summer slowdown, construction activity still robust

The overall industrial vacancy rate stood at 5.4% for Q3 2017, a decrease of 20 basis points quarter-over-quarter and an increase of 20 basis points year-over-year. Net absorption finished the quarter at positive 2,991,769 sq. ft., up from negative 67,870 sq. ft. as of the second quarter’s end, tallying close to 6 million sq. ft. year-to-date. Both the Houston metro’s overall rent and leasing activity are down from last quarter, with the difference larger from a year ago. However, despite the summer slowdown, current construction activity remains steady at 4.86 million sq. ft., up slightly from this time last quarter, while the amount of square feet delivered to the market in the third quarter increased to 2.54 million sq. ft. compared to 1.56 million sq. ft. at the end of the second quarter.

Hurricane Harvey alters economic activity

The Houston economy sustained moderate growth, but at a slower pace through August. The business-cycle index and employment data were softer, and the energy industry provided less of a helping hand to Houston over the summer. Striking at the end of August, Hurricane Harvey was not included in the jobs data for August; however, a breakdown by the Dallas Fed suggests that while Harvey’s impact will be felt deeply, Houston and the Texas Gulf Coast are expected to recover quickly. Houston’s unemployment rate was 5.0% in August, up from a revised 4.6% in July. The August unemployment rate for Texas was 4.2% and 4.4% for the U.S. After the storm, the shutdown of refinery capacity drove the price of West Texas Intermediate crude oil (WTI) down, and also pushed motor fuel prices up. WTI has traded between $45 and $55 over the majority of the past year, while the weekly retail price of regular gasoline rose 36 cents per gallon in Houston. Overall, while the outlook for the immediate future is unsure, prospects for the next few years remain positive.

HOUSTON INDUSTRIAL | Q3 2017 Quarterly Market Report | graphs and tables

HOUSTON INDUSTRIAL | Q3 2017 Quarterly Market Report | graphs and tables

Broker’s Perspective

As the Greater Houston area continues its recovery from the aftermath of Hurricane Harvey, those in the industrial sector have been keen to determine how deeply Harvey affected our product type. The industrial real estate market—like much of the metro—hit the pause button for a couple of weeks even though it felt like much longer. As the Houston area has since returned to business with some sense of normalcy post-Harvey, we have seen activity levels pick back up, with increased movement in virtually all industrial submarkets.

Lowe’s, through a third-party logistics provider, NFI, plans to sign a three-year lease for 250,000 sq. ft. of industrial space, per industry sources, as a direct result of Hurricane Harvey. In addition, Home Depot signed a lease in March 2017 for 300,000 sq. ft. of warehouse space in Northwest Houston, to store additional inventory, with a planned move-in date of September 2017. Both retail giants absorbed sizable space to address demand for construction supplies.

Following increased demand, the overall vacancy rate has decreased slightly over the past quarter. Consumers in need of construction supplies, along with increasing requirements for ecommerce facilities are two significant factors driving the vacancy decline. The recent announcement of the speculative 673,785-sq.-ft. distribution facility being developed by Oakmont Industrial Group and marketed by NAI Partners in West Ten Business Park in Katy is a testament to the growing appetite for buildings that can serve online retailers as well as many other types of distribution uses. Lastly, the Southeast submarket has also remained strong due to the need for rail-served product.

The resiliency the Houston area has shown post-Harvey is a reminder to all how strong the industrial market is and should continue to be in the future.

Darren O’Conor
Vice President
NAI Partners


Vacant space drops to 5.4% of the market

Houston’s overall vacancy rate stood at 5.4% for Q3 2017, a decrease of 20 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, rose 10 basis points to 9.4% as of the third quarter 2017. Among the major property types, Warehouse/Distribution ended at 5.5% availability, Manufacturing closed at 2.6%, and Flex space finished at 10.5%.

HOUSTON INDUSTRIAL | Q3 2017 Quarterly Market Report | graphs and tables

HOUSTON INDUSTRIAL | Q3 2017 Quarterly Market Report | graphs and tables

Net absorption back up to speed

Net absorption for the overall Houston industrial market was positive 2,991,769 sq. ft. during the third quarter. The major move-ins contributing to net absorption include 225,000 sq. ft. of space taken by Supply Chain Management in Bayport North Distribution Center; 225,000 sq. ft. of space occupied by MEI Rigging and Crating at 6501 Navigation Blvd.; and 128,720 sq. ft. of space absorbed by Relevant Power Solutions at 20120 E. Hardy Road. The major move-outs involve Weatherford vacating 130,113 sq. ft. of space at 22001 Northpark Drive; 129,000 sq. ft. left by Aztech Windshield at 8601 Boone Road; and 128,924 sq. ft. emptied by McLane Global in Central Green Corporate Center.

HOUSTON INDUSTRIAL | Q3 2017 Quarterly Market Report | graphs and tables

Demand intensifies as ecommerce evolves

You can add to the current 4.86 million sq. ft. under construction in the Houston industrial market, a speculative 673,785-sq.-ft. distribution facility in Katy to meet the ever-growing demand from retailers for warehouse/distribution space. The future distribution center broke ground in late September, with plans to deliver in July 2018. The project will be built on a 42-acre tract in Houston-based Parkside Capital’s West Ten Business Park. Developer Oakmont Industrial Group purchased the area from Parkside in late September. Both the city of Katy and Waller County gave Oakmont tax incentives as part of the agreement. Upon delivery, the distribution facility will include all of the latest ways to optimize proficiency, including 36-foot-high ceilings, 70-foot-deep loading bays, 56-foot-wide column spacing, ESFR sprinklers and LED warehouse lighting, and an abundance of parking space. Most recently, the park has become home to Buc-ee’s convenience store and Germany-based Pepperl+Fuchs’ warehouse and manufacturing plant. The current vigorous development activity comes on the heels of a rush of consumer goods retailers—including Amazon, Ikea and Best Buy—either having leased or looking to lease distribution space in Houston. Consumer ecommerce is driven by the best prices on products that can be delivered the fastest, with the current pace of demand only intensifying going forward. Whether driven by millennials or Generation Z, immediate gratification and the consumer experience will continue to evolve and Houston will be there to answer the call.

HOUSTON INDUSTRIAL | Q3 2017 Quarterly Market Report | graphs and tables

Average asking NNN rent dips slightly

The industrial market saw overall average asking rates drop $0.08 per sq. ft. quarter-over-quarter to finish at $6.76 per sq. ft. at the end of Q3 2017. Rates for industrial real estate throughout Houston show that the Southwest submarket has the highest prices for industrial space at $7.27. The average rate for Flex space is currently highest in the CBD submarket, at $15.32 per sq. ft.; Manufacturing rates peak in the Southeast at $6.70; and Warehouse/Distribution space is at its high point in the North at $7.20.

HOUSTON INDUSTRIAL | Q3 2017 Quarterly Market Report | graphs and tables

Optimistic investment sales and leasing activity

Real Capital Analytics data reports year-to-date industrial sales volume in the Houston area at $1.151 billion, resulting in a year-over-year change of 122%. The buyer composition is made up of 33% institutional, 33% private, 16% public listed/REITs, 12% cross-border, and 6% user/other. Another positive sign for the Houston industrial market is the WPT Industrial REIT acquisition of Apex Distribution Center in northwest Houston, a three-building industrial park that totals 410,600 sq. ft. from Crow Holdings Industrial. The northwest Houston properties are located at the W. Sam Houston Tollway on Brittmoore and Tanner roads and were built between 2005 and 2016 with the first project in the park constructed as a build-to-suit for Goya Foods. The current tenant list includes Dawn Food Products, TSC Apparel Co. and Eleganza Tiles. At the time of the sale the project was 86.2% leased.

Leasing activity slowed during the third quarter with a total of almost 4 million sq. ft. leased in the overall Houston market. This is in comparison to 6.5 million sq. ft. leased throughout Q2 2017. Warehouse/Distribution space led the way at 3.4 million sq. ft. or 87%, followed by Flex space fulfilling 447,000 sq. ft., and Manufacturing space realizing 75,000 sq. ft. These amounts are down significantly from both this time last quarter and last year. Despite that, Emser Tile started construction on a 600,000-sq.-ft. build-to-suit in Pinto Business Park in north Houston.  Current tenants in the park include Amazon, HD Supply, The Reynolds Co., and Sysco Corp. The development is scheduled for completion in the second quarter of 2018.

HOUSTON INDUSTRIAL | Q3 2017 Quarterly Market Report | graphs and tables

Quick recoveries at Port Houston and Houston Airport System

Port Houston’s recovery from Hurricane Harvey began on September 1 as Barbours Cut and Bayport Container Terminals handled five thousand gate transactions. Vessel activity and gate operations continued seamlessly through that weekend. As for the Houston Airport System, all major airlines ramped back up to their standard schedules less than two weeks after the storm.

Leta Wauson
Director of Research
tel 713 275 9618

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