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Houston’s average industrial vacancy rate increased 30 basis points quarter-over-quarter to 6.9%, which also represented an increase of 150 basis points year-over-year. At the end of the fourth quarter, Houston had 38.6 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 continue to climb

Houston’s average industrial vacancy rate increased 30 basis points quarter-over-quarter to 6.9%, which also represented an increase of 150 basis points year-over-year. At the end of the fourth quarter, Houston had 38.6 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 41 million sq. ft., positive quarterly absorption of 2.3 million sq. ft.—up 90.7% compared to Q3 2019—is a welcome sign. The record-breaking levels of new construction have contributed to driving the vacancy rate up, as there has been 9.6 million sq. ft. of available space delivered to the market in 2019—about half of the total 18 million sq. ft. completed. The vacancy rate for Class A properties is at 13.6%, up from 7.6% this time last year. The overall monthly average asking triple-net rent is $0.61 per sq. ft., unchanged quarter-over-quarter and year-over-year.

Job growth remains healthy

The Houston metro created 85,500 jobs, a 2.7% increase, in the 12 months ending November 2019 according to the Texas Workforce Commission—a number that may change when benchmark revisions are released later in the year. By industry, Professional and Business Services had the largest year-over-year increase with 26,400 jobs, followed by 13,000 jobs in Education and Health Services, and then Mining, Logging and Construction at 10,800 jobs. Houston’s unemployment rate was 3.6% in November, down from 3.8% in November of last year. For comparison, the Texas and U.S. rates were both 3.3%. The rates are not seasonally adjusted. The U.S. Energy Information Administration reported that the closing spot price for a barrel of West Texas Intermediate was $61.14 per barrel as of December 31, 2019, up from $45.15 the same time last year. Baker Hughes reported the U.S. rig count at 805 as of December 27, 2019, down -279 from a year ago.

MARKET OVERVIEW

New supply continues to outpace demand

Supply has outpaced demand for the last seven quarters in the Houston industrial market. The amount of industrial space delivered to the market during Q4 2019 was 4.9 million compared to 2.3 million sq. ft. of net absorption—the third-widest quarterly margin ever recorded, with all three of those deltas recorded in 2019. For existing buildings, net absorption is the measure of total square feet occupied less the total space vacated over a given period of time. Positive influences on net absorption during the fourth quarter include 548,519 sq. ft. of space coming online at the Costco Wholesale Distribution Center on Highway 90 near the Igloo and Amazon plants in Katy; 251,753 sq. ft. of space absorbed by COE Distributing at 10620-10700 Telge Road – Building 3 in Highland Grove Industrial Park in the Northwest Outliers submarket; and 220,000 sq. ft. of space absorbed at 18314 Mathis Road in Waller. Negative effects on overall net absorption involve Interport Business Park – Interport II adding 296,400 sq. ft. into the market; 100,000 sq. ft. at 812 Live Oak St. in Downtown; and 75,744 sq. ft. at 8708 W. Little York in Cole Creek Business Park added back to the Highway 290/Tomball Parkway submarket. Overall net absorption during 2019 totaled 8.7 million sq. ft., primarily consisting of Warehouse/Distribution space.

A strong end of year for Port Houston

Port Houston is the fastest-growing container port in North America. Port Houston reported that container volume is expected to reach an all-time high of nearly three million TEU for 2019. Port Houston also ranks No.1 in North America for general cargo, handling breakbulk, special project, and steel, and is expected to record four million tons of volume in 2019. In December, the Port Commission awarded the Houston Ship Channel $6.3 million to go towards infrastructure and communications in addition to an award of $5.75 million to construct two radio towers. Port Houston’s top priority remains assisting in acquiring federal authorization to expand the Houston Ship Channel. The Port Commission authorized an additional $400,000 in funding to support a design review of the channel project expansion program. These funds are in addition to a record of $23 million already invested in this effort.

Industrial investment sales

Real Capital Analytics data reports quarterly industrial sales volume for Q4 2019 in the Greater Houston area at $198 million, compared to fourth quarter 2018 at $723 million. The primary capital composition for buyers in the fourth quarter was made up of 53.2% private investors, and 32.7% institutional. For sellers, the majority was 42.8% private, and 27.3% cross-border (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 December, DRA Advisors acquired Sam Houston Business Park from Sealy & Co. for an undisclosed amount. The sale was for a total of four industrial buildings located in the Highway 290/Tomball Parkway area of the Northwest submarket. The four buildings total about 267,000 sq. ft. and were 83% occupied at time of sale.

Leasing activity

The volume of signed lease transactions during the fourth quarter was 5.5 million sq. ft.—down from the previous quarter’s 7.2 million sq. ft., although ecommerce and logistics activity continue to be strong in Houston. The largest leases signed in Q4 2019—which is comprised of both new leases and renewals— include Eugene B. Smith & Co. taking 345,100 sq. ft. of space at 411 Brisbane St. in the South submarket with plans to occupy the space in June 2020; Amazon.com inked a deal for 238,000 sq. ft. at 28420 West Ten Blvd. in Katy; and Gerber Plumbing Fixtures signed a lease for 180,000 sq. ft. at 300 S. Sheldon Road in Channelview with plans to move-in during Q2 2020. The greatest amount of leasing activity took place in the Northwest submarket during Q4 2019 at 1.5 million sq. ft. (28%), followed by the North submarket at 1.2 million sq. ft. (22%), and the Southwest market ranked 3rd at 835,000 sq. ft. (15%).

Average asking NNN rent increases

Monthly rental rates for the entire market on average have maintained $0.61 per sq. ft., as of the fourth quarter of 2019, unchanged quarter-over-quarter and year-over-year. The monthly average rate for Flex space is currently at $0.81 per sq. ft.; Manufacturing rates are at $0.58; and Warehouse/Distribution space sits at $0.57. The North ($0.67 PSF) and Southwest ($0.65 PSF) submarkets currently have the highest monthly overall average rate, followed by the Northwest ($0.62). With the rising costs to developers that are bringing new projects with high quality space to the market, rental rates could continue to increase in the future.


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

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