Houston’s industrial market expansion continues with the addition of 13M SF of new inventory this year
Houston’s industrial market expansion continues with 4.1M SF of new inventory added in the third quarter of 2019, pushing the year-to-date total to 13M SF. There are 150 buildings with 18.5M SF of space under construction, which will deliver in 2019 and the first half of 2020, no doubt pushing the overall vacancy rate higher. Only 25% of the space currently under construction is pre-leased and, if delivered today would increase Houston’s total vacancy from 6.6% to 8.3%, but historical statistics reveal that an additional 10-25% will be pre-leased before delivery. Although the third quarter of 2019 recorded an increase in vacancy, Houston’s industrial market should remain healthy, provided leasing activity remains steady.
Looking forward, approximately 2.2M SF will be absorbed by tenants with expected move-in during Q4 2019. Some of the tenants scheduled to take occupancy during Q4 include Boral Windows moving into 154,661 SF in the Northwest Near submarket, Agility Project Logistics moving into 160,000 SF in the North Hardy Toll Rd submarket and SNAPP USA occupying 134,680 SF in the East-Southeast Far submarket.
Houston’s job growth increased by 2.6% over the year, according to recent data released by the U.S. Bureau of Labor Statistics. The Houston MSA created 80,600 jobs (not seasonally adjusted) between August 2018 and August 2019, growing faster than Texas and the U.S. during the same time period. Employment sectors with the most substantial annual growth include mining and logging which grew by 10.7%, fabricated metal product manufacturing grew by 10.2%, petroleum and coal products manufacturing grew by 16%, professional, scientific and technical services grew by 8.9% and architectural, engineering and related services grew by 9.7%. Industry sectors that lost jobs over the year include information which includes technology jobs contracted by 5.1%, professional and business services fell by 3.5%, transportation and utilities contracted by 3.5%.
Vacancy & Availability
On an annual basis, Houston’s average industrial vacancy increased 90 basis points from 5.7% in Q3 2018 to 6.6% in Q3 2019. It rose 30 basis points on a quarterly basis from 6.3% in Q2 2019. At the end of the third quarter, Houston had 37M SF of vacant industrial space for direct lease and an additional 2.3.M SF of vacant space for sublease. Among the major industrial corridors, the Inner Loop Corridor had the lowest vacancy rate at 4.5%, followed by the South Corridor at 5.4%. The submarket with the largest percentage of vacant space in the Northwest Corridor, which had a 7.6% vacancy rate.
Absorption & Demand
Houston’s industrial market posted 0.6M SF of positive net absorption in the third quarter, pushing the year-to-date total absorption to 5.2M SF. Some of the tenants that relocated or expanded in Q3 2019 include The Grocers Supply Co, moving into 727,600 SF in the North Corridor, American Furniture Warehouse moving into 350,000 SF in the Southeast Corridor and Exterran Inc moving into 343,750 SF in the Northwest Corridor.
The majority of third-quarter positive net absorption occurred in the Northwest and Southwest Corridors, recording 0.6M SF and 0.3M SF, respectively. The Northeast and Southeast Corridors also recorded positive net absorption in the third quarter of 2019. The Inner Loop, North and South Corridors recorded negative net absorption. Over 4.1M SF of new inventory delivered during the quarter. The Southeast Corridor had the most significant amount of new inventory, 1.1M SF, delivered during the third quarter.
According to our data service provider (CoStar Property), Houston’s citywide average quoted industrial rental rate for all product types increased from $7.44 per SF NNN.
Based on data from our data service provider, the average quoted NNN rental rates by property type are as follows: $7.12 per SF for Warehouse Distribution space, $8.97 per SF for Flex/Service space, Tech/R&D space averaging $10.18 per SF and $5.39 per SF for Big Box. All rates saw an increase between Q2 and Q3 2019. to $7.54 per SF NNN over the quarter. According to Colliers’ internal data, actual lease transactions are in the $4.68 – $5.28 per SF NNN range for newer bulk industrial spaces, while flex rates range from $7.20 to $10.80 per SF NNN depending on the existing improvements or the allowance provided for tenant improvements and the age and location of the property.
According to our data service provider (CoStar Property), Houston’s industrial leasing activity increased slightly over the quarter from 6.0M SF in Q2 2019 to 6.4M SF in Q3 2019. Most of the Q3 2019 transactions consisted of leases for 75,000 SF or less; however, there were several larger deals that occurred. The table below highlights some of the larger transactions that closed in Q3 2019.