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Houston’s average industrial vacancy rate increased 30 basis points quarter-over-quarter to 8.8%, which also represented an increase of 220 basis points year-over-year.


EXECUTIVE SUMMARY

Vacancy rate increases to 8.8%
Houston’s average industrial vacancy rate increased 30 basis points quarter-over-quarter to 8.8%, which also represented an increase of 220 basis points year-over-year. At the end of the fourth quarter, Houston had 54.3 million sq. ft. of vacant industrial space for direct lease and an additional 1.4 million sq. ft. of vacant sublease space. The rise in the Houston industrial vacancy rate is due in part to the record levels of new construction, as a record-breaking 30.3 million sq. was delivered to the market in 2020. Of that total, 13.6 million sq. ft., or 44.7% is available for lease. The vacancy rate for Class A properties is at 18.6%, up from 12.5% this time last year. Total inventory for Class A space represents 117 million sq. ft., up from 94.1 million sq. ft. at the end of 2019, a 25.0% increase. Fourth quarter overall net absorption was at 6.2 million sq. ft., with 8.7 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 $0.61, due primarily to the new product delivered to the market.

Houston economic indicators
The Federal Reserve Bank of Dallas revised estimates for metro Houston’s pandemic job losses at 366,800 released in November. Since April, Houston has added back 147,500 of those lost jobs, as local employment data indicate improvement in October. Demand for petroleum made a significant recovery in 2020, bringing prices from brief negative territory to close to $50 a barrel. Some forecasters project oil will end 2021 at $60 a barrel, a level that would mean strong profits for many oil companies. With the pandemic hopefully heading towards an end with the recent vaccines, 2021 may be a time of significant changes for the various industries depending on how consumer behavior may change going forward. Time will tell how the pandemic has changed the world and the consequences for the future.


BROKER’S PERSPECTIVE

2020, What a year! While most of the world and local market are anxiously ready to usher in 2021, the Houston Industrial Market is able to reflect on what was overall, a sound year of growth and demand.

Ecommerce deals and third-party logistics firms drove a significant amount of industrial market activity in 2020. Amazon announced multiple new deals for the area, as did Lowe’s, Home Depot, Dunavant, Pioneer Technology, Daikin, and Slay Industries. Deals over 500,000 sq. ft. have become much more commonplace in the Houston market, a trend we expect to see continue.

The manufacturing market remained somewhat soft with the lower price of oil. Smaller crane-served buildings continued to sell and lease. Demand for larger manufacturing buildings will continue to be soft until larger oilfield service/manufacturing companies reengage.

Overall new construction slowed, but speculative projects have still been announced. Markets for new construction continue to move to the outer edges of Houston in nearly all directions. Katy, Baytown, Rosenberg, and Conroe all have multiple new projects under construction at this time.

Pent-up demand from Q2 2020 and Q3 2020 led to a very active fourth quarter in 2020. Over 6.2 million sq. ft. of absorption in the fourth quarter alone led to over 14.5 million sq. ft. of absorption for 2020! This is significant for Houston, especially in 2020. Rates remained somewhat flat and vacancy crept slightly higher.

Debt remains very attractive to both users and investors with low interest rates. Houston saw record-low on cap rates as well, even below 4.0% for certain assets.

Entering 2021, we foresee continued demand for distribution space on pent-up demand. Manufacturing activity should reengage shortly as well with oil prices nearing $50/bbl again. Fundamentally sound locations should do well.

Gray Gilbert
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 2020 is 30.3 million sq. ft., more than double the amount of net absorption at 14.5 million sq. ft. With that said, full-year absorption of 14.5 million sq. ft. is tied for the second-highest single-year total since NAI Partners began tracking industrial market data over 20 years ago. Q4 also marked the 46th straight quarter the Houston Industrial market has recorded positive absorption. For existing buildings, net absorption is the measure of total square feet occupied less the total space vacated over a given period. Houston industrial vacancy increased 30 basis points quarter-over-quarter to 8.8%, which also represented an increase of 220 basis points year-over-year.

Construction
Houston continues to experience record amounts of industrial product under construction with the current volume at 8.7 million sq. ft. 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. In addition, Amazon.com is building an 850,000-sq.-ft. fulfillment center on 93.5 acres at 10507 Harlem Road in Richmond in Fort Bend County. The facility is expected to open in 2021.

Port of Houston #1 Port in U.S.
The Houston Ship Channel port complex and its public and private terminals, collectively known as the Port of Houston, is now the number one port in the United States in terms of total waterborne tonnage, newly released government statistics show. It is also ranked first for foreign waterborne tonnage and number of vessel transits. Nearly 285 million tons of cargo moved through the Port of Houston overall in 2019, which was about 47 million tons more than any other U.S. port and a 6% increase compared to the previous year. In addition, Port of Houston will be the first port of call in the United States on a new direct Trans-Pacific Asia service being launched by THE Alliance called the “EC6,” an East Coast all water service via Panama calling the U.S. Gulf. Economic expansion and corporate relocations (Tesla, Hewlett Packard, Oracle are among several new corporate relocations recently announced) have fueled a large and fast growing consumer base and strong housing market which has translated to new import distribution centers in Houston and throughout Texas. Combined with the biggest manufacturing region in the North America for exports, Houston and the U.S. Gulf is a prime area for carrier service growth.

Investment sales trends
Real Capital Analytics data reports quarterly industrial sales volume for Q4 2020 in the Greater Houston area at $518 million. The year-over-year change in quarterly volume is down 24.6% from $687 million in Q4 2019. The primary capital composition for buyers in the fourth quarter was made up of 47.2% REIT/listed investors, and 28.2% private. For sellers, the majority was 39.0% private investors, and 38.6% REIT/listed investors. In Pearland, 14800 Jersey Shore Drive, LLC., recently sold its former industrial campus at 320, 322 & 324 Riley Road which consisted of approximately 105,664 sq. ft. between three industrial buildings on 32.70 acres of combined land area to BHVA Real Estate Holdings, LLC. NAI Partners represented the seller on the transaction and Oxford Partners represented the buyer.

Leasing Activity
The volume of signed lease transactions during the fourth quarter was 7.6 million sq. ft.—up from the previous quarter’s 6.2 million sq. ft. The largest leases signed in Q4 2020—which is comprised of both new leases and renewals— include Warehouse Services renewal of 663,821 sq. ft. of space at 8800 Citypark Loop in the Northeast Highway 90 submarket; H-E-B’s renewal deal for 401,280 sq. ft. at 4501 Blalock Road in the Northwest Inner Loop submarket; and DHL’s lease renewal for 254,160 sq. ft. at 8833 Citypark Loop in the Northeast Highway 90 submarket. Houston industrial vacancy increased 30 basis points quarter-over-quarter to 8.8%, which also represented an increase of 220 basis points year-over-year.

Average asking NNN rent
Monthly rental rates for the entire market on average was $0.64 per sq. ft., as of the end of 2020, down slightly quarter-over-quarter from $0.65 per sq. ft., although up year-over-year from $0.61. The monthly average rate for Flex space is currently at $0.88 per sq. ft.; Manufacturing rates are at $0.56; and Warehouse/Distribution space sits at $0.60. The Southwest ($0.77 PSF) and North ($0.70 PSF) submarkets currently have the highest monthly overall average rate, followed by the Northwest ($0.63). 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

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