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Houston’s average industrial vacancy rate increased 50 basis points quarter-over-quarter to 8.6%, which also represented an increase of 200 basis points year-over-year.


Vacancy rate increases to 8.6%

Houston’s average industrial vacancy rate increased 50 basis points quarter-over-quarter to 8.6%, which also represented an increase of 200 basis points year-over-year. At the end of the third quarter, Houston had 51.5 million sq. ft. of vacant industrial space for direct lease and an additional 1.7 million sq. ft. of vacant sublease space. The rise in the vacancy rate is due in part to the record-breaking levels of new construction, as 11.7 million sq. ft. of available space has been delivered to the market so far in 2020—about 56% of the total 21.1 million sq. ft. completed. The vacancy rate for Class A properties is at 18.0%, up from 12.5% this time last year. Quarterly net absorption was at 932,000 sq. ft., down 75.2% compared to Q2 2020, and down 44.8% from Q3 2019.The overall monthly average asking triple-net rent is up at $0.64 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

According to the Federal Reserve Bank of Dallas, Houston payrolls lost 353,600 jobs between February and April 2020 as pandemic lockdowns limited economic activity. The most recent data show that the total number of jobs recovered since April increased from 106,600 in July to 117,100 in August. That puts Houston’s recovery at 33% of jobs lost. The price of West Texas Intermediate (WTI) crude oil recovered to the low $40’s over the summer. It bottomed in late April 2020, averaging under $17 a barrel. Historically, a change in the price of oil precedes a change in the rig count by about three months. The U.S. weekly rig count bottomed in early August, at 244 rigs, a record low, and had only managed to inch up to 261 the week ending Sept. 25. WTI weakened slightly in September, averaging nearly $40 for the month. WTI has yet to break above $50, the level most firms in the Dallas Fed Energy Survey believe will be needed to see a substantial increase in drilling activity.




As we move into the final quarter of what has been a very interesting year so far (to say the least), the main issues affecting the Houston industrial real estate market are the same issues affecting the economy as a whole: the ongoing COVID-19 global pandemic, the upcoming presidential election, and the continuing downturn in the energy industry. And though it’s true that our market indicators are not where we would like them to be, they don’t tell the entire picture.

While the COVID-19 pandemic put many transactions “on hold” (which is reflected in the decreases in net absorption and leasing activity), a number of deals have come back to life and we expect to see these numbers turning positive in Q4 2020 and Q1 2021.

Warehouse/distribution owners and developers have an increased focus on serving an e-commerce supply chain. Given Houston’s population growth projections in the coming decade, and the rise in online shopping across all demographic sectors, developers are looking for well-positioned infill sites to build “last mile” delivery facilities, and larger sites for their big box distribution buildings. Additionally, we’re seeing a renewed interest in capital starting to flow back into the Houston industrial market to support potential new development. We still have a decent amount of existing new supply to chew through to get our vacancy numbers back in balance, but with decision-makers starting to travel again, property tour activity is up, and new lease deals won’t be far behind. That said, it’s still a good time to be a strong credit tenant looking for warehouse space in Houston.

For now, everyone is trying to figure out what a post-COVID, post-election world might look like. And we won’t know until we get there. Just as lease and sales comps from a year ago don’t really apply in our current situation, comps from today most likely won’t matter much a year from now. But we’re starting to see a light at the end of the tunnel. Houston has recovered 33% of jobs lost since April, and there is a noticeable uptick in interest from tenants, investors and developers. That, combined with our city’s entrepreneurial “can do” spirit, bodes well for the Houston industrial real estate market going forward. And NAI Partners will be here, ready to help our clients identify opportunities to create cost-saving and risk-mitigating real estate decisions aligned with their immediate and long-term needs.

Holden Rushing

Holden Rushing
Senior Vice President
NAI Partners


Supply outpacing demand

Supply has outpaced demand since Q1 2018 in the Houston industrial market. The amount of industrial space delivered to the market so far in 2020 is 21 million sq. ft., more than two-and-one-half times the amount of net absorption at 8.1 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.


Houston continues to experience record amounts of industrial product under construction with the current volume at 16.2 million sq. ft. Hunt Southwest Real Estate Development has broken ground on a 1-million-sq.-ft. speculative industrial project in Baytown. The company said the project was driven, in part, by the surge in online retail sales amid the COVID-19 coronavirus pandemic. The building, named Cedar Port Trade Center is reportedly the largest speculative industrial project under one roof now being built in the Houston area. The project is located at 4633 Borusan Road off Farm to Market 1405 within TGS’s Cedar Port Industrial Park, the massive 15,000-acre, master-planned park southeast of Houston. Cedar Port Trade Center has a shell completion date of March 2021.

Most stable numbers since pandemic began at Port Houston

Port Houston’s container activity in August neared 2019’s record volume levels for the first time since the onset of the COVID-19 pandemic. In the month of August Port Houston handled 248,630 TEUs, only 4% less than August of 2019. This also reflects a 5.9% gain over July of this year. In fact, August shows a significant increase in container volume as compared to the previous several months. Declines in March through July ranged from 10% through 16%. Total tonnage at Port Houston in the month of August was down 7%, with steel, breakbulk cargo and autos all down compared to August of last year, although grain and bulk cargo again showed increases. For the first six months of this year, container TEUs at Port Houston, the 6th largest container port in the United States, declined just 2.3% compared to the same period last year, according to Port Houston records. Data from PIERS, a leading provider of import/export data, indicated that Port Houston had the smallest decline of the top 10 container ports in the nation

Investment sales trends

Real Capital Analytics data reports quarterly industrial sales volume for Q3 2020 in the Greater Houston area at $145 million. The year-over-year change in quarterly volume is down 86.1% from $1 billion in Q3 2019. The primary capital composition for buyers in the third quarter was made up of 59.0% REIT/listed investors, and 22.5% private. For sellers, the majority was 42.3% REIT/listed investors, 38.0% private, and 7.6% cross-border investors (a transaction is defined as cross-border if the buyer or major capital partner is not headquartered in the same country where the property is located). In July, Stonelake Capital Partners purchased the final phase of West Ten Business Park, which includes a 238,000-sq.-ft. last-mile facility fully leased by Amazon at 28420 West Ten Blvd. in Katy. The seller, Transwestern Development Company and UBS Realty Investors sold the 41-acre site that includes a 15-acre surface parking lot, as well as a 14-acre tract for future development.

Leasing Activity

The volume of signed lease transactions during the third quarter was 4.9 million sq. ft.—down from the previous quarter’s 6.2 million sq. ft., although ecommerce and logistics activity continue to be strong in Houston. The largest leases signed in Q3 2020—which is comprised of both new leases and renewals— include DHL’s renewal of 254,160 sq. ft. of space at 8833 Citypark Loop in the Northeast submarket; S. I. Warehousing Company’s deal for 252,203 sq. ft. at 625 Independence Parkway in Deer Park; and MiTek’s lease for 156,505 sq. ft. at 560 E. Richey Road in the North Hardy Toll Road submarket.

Average asking NNN rent increases

Monthly rental rates for the entire market on average increased to $0.64 per sq. ft., as of the third quarter of 2020, up quarter-over-quarter and year-over-year. The monthly average rate for Flex space is currently at $0.91 per sq. ft.; Manufacturing rates are at $0.58; and Warehouse/Distribution space sits at $0.60. The Southwest ($0.79 PSF) and North ($0.70 PSF) submarkets currently have the highest monthly overall average rate, followed by the Northwest ($0.62). 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
tel 713 275 9618

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