Houston’s industrial market closes out the year with a strong finish

2017Q4HoustonIndustrialMarketIndicators

The resiliency of Houston’s industrial real estate market is truly astounding. Outsiders have always considered Houston to be an “oil town” with our economic success tied to the geopolitical intricacies of the international oil and gas markets. Three years into the oil and gas downturn, Houston has proven yet again that we have a truly diversified economic base. As a result, Houston’s industrial real estate market has enjoyed a disproportionate benefit of that concerted effort to have a truly balanced economy.

From 2009 to 2014, while the national economy sputtered along due to anti-business policies of the Obama administration, Houston enjoyed a countercyclical economic boon as all sectors of the oil and gas industry added jobs, increased investment and drove demand for oil service related real estate. Manufacturers and distributors made significant real estate commitments to manufacturing, property and equipment as they worked to meet the demand for materials and services related to the growth in domestic shale exploration and production. When the music stopped in November 2014, outsiders such as wall street analysts and CNBC pundits threw their hands in the air, called it the end of Houston’s growth story and declared that it would be the 1980’s all over again.

Houston real estate veterans, however, trusted in our diversified economy and found ways to meet the demand of other sectors as the national economic output increased. Certainly, the industrial real estate community had issues with subleases, defaults and other activity that arose due to the energy industry downturn. However, the growth of e-commerce, the region’s natural population growth, increased Port of Houston infrastructure investment and increased consumer demand all contributed to a robust industrial market that truly reflects Houston’s economic diversity and its irrepressible ability to bounce back from adversity. 

Houston has been a late-comer to the unprecedented growth of e-commerce logistics. Not only have we seen multi-million SF investments by Amazon, UPS, FedEx and other providers, but we are also seeing providers to these major distributors seeking to establish regional distribution and return centers related to online sales. As an example to meet this demand, Oakmont Industrial Group has a speculative 700,000 SF warehouse under construction now that is designed to meet the demands of future e-commerce growth in our region.

Closely tied to e-commerce growth is the population growth in the Houston MSA. With population growth from 2010 to 2016 that averaged over 2,600 people per week and with projections that the area population will double to almost 15 million people by 2050, Houston is a major economic force with tremendous consumer buying power. While core markets such as Dallas, Atlanta, Chicago and Los Angeles have typically met the need for distribution related to consumer demand, Houston has emerged as a new core market as distributors seek to be closer to the end users of their products. Our proximity to San Antonio and Austin, our relatively low regulatory environment and the infrastructure assets including our rail network, interstate highway systems and the Port of Houston complex all work together to drive demand for Houston’s industrial market.

The submarkets around the Port of Houston were the weakest in the Houston area from 2005 to 2014. A number of developers built millions of square feet of buildings on the promise that Houston’s Port infrastructure development around the container handling facilities and the widening of the Panama Canal would drive demand. While some success was achieved in that area, true growth in new construction and increasing rental rates has been fairly recent. The main impetus for this growth has been the increased output of the petrochemical plants – both in chemicals and plastic resin. The abundant energy source from the domestic oil and gas shale plays around the United States led to over $50 billion in new plant investment. Now that the expanded production capability is online, logistics providers have taken down almost all new industrial space that has been built in the Port submarkets at rental rates that have provided very solid returns to developers that built speculative buildings to meet this new demand. Also tied to the Port of Houston is continued growth in container traffic, with consumer products companies such as Wal-Mart, Home Depot and Ikea making significant investments and also considering additional real estate commitments.

Certainly, there are many promising statistics that speak to the overall strength of the Houston industrial market. In spite of tepid economic growth over the past 3 years, industrial absorption rates has remained steady as new construction has declined across the region. Houston continues to be a market leader in high 95%+ occupancy rates and in stability of rental rates.

Even with remaining uncertainty in the oil and gas sector of the economy, Houston’s industrial market has shown a resilient ability to adapt to continually evolving economic forces. Looking into the future, we see continued disruption and growth in the e-commerce arena, increasing use of the Port of Houston infrastructure to handle inbound containerized consumer goods and outbound raw material shipments, natural population growth and in-bound migration that will drive increased consumer spending and eventual stabilization of the global oil and gas economy. Mainly, as has been proven for almost 180 years of Houston economic history, the economy will adapt to changing market forces  and intelligent investors, whether industrial developers, private investors, or entrepreneurs that drive economic growth will benefit by making the right bet on Houston’s resiliency.

Vacancy & Availability

Houston’s average industrial vacancy rate increased 10 basis points from 5.3% to 5.4% over the quarter. At the end of the fourth quarter, Houston had 28.1M SF of vacant industrial space for direct lease and an additional 1.6M SF of vacant sublease space. Among the major industrial corridors, the Northeast Corridor has the lowest vacancy rate at 3.0%, followed by the South Corridor at 3.5% and the Southeast Corridor at 4.2%. The largest percentage of vacant space is located in the North Corridor which has a 7.7% vacancy rate.

Leasing Activity

Houston’s industrial leasing activity increased 11.8% over the quarter from 5.0M SF in Q3 2017 to 5.6M SF in Q4 2017. Total 2017 leasing activity which includes renewals reached 23.7M SF. Most of the transactions consisted of leases for 50,000 SF or less, but there were several larger deals that occurred. The table below highlights some of the larger transactions that closed in Q4 2017.

Q4 2017 Industrial Lease Transactions over 100,000 SF

Building Name/Address

Submarket

SF

Tenant

Lease Date

Mason Ranch Building 1

Northwest Outlier

373,860

Rooms to Go3

Dec-17

Greenspoint Business Center Building E

North Outer Loop

244,550

NFI3

Dec-17

Carson Bayport 3

East-Southeast

231,875

Palmer Logistics3

Nov-17

15894 Diplomatic Plaza Dr

North Hardy Tool Road

128,500

Transaction Packing & Houston Warehousing and Custom Crating1,4

Nov-17

960 Pleasantville Dr

Southeast Outer Loop

102,000

Metrix Logistics Group3

Nov-17

                                                           

1Colliers International Transaction

2Pre-lease in a proposed/under construction building

3Direct/New

4Sublease

Under Construction

Currently 6.4M SF of industrial space is under construction in Houston and 29.3% is pre-leased. Only 3.4% of the 4.6M SF of spec space under construction is pre-leased at this time. The largest project under construction is a 673,785-SF spec distribution warehouse located in the Northwest Outliers submarket. Below is a partial list of buildings currently under construction.

Q4 2017 Industrial Under Construction - 200,000 SF or greater

Business Park/Address

Submarket

RBA

% LEASED

DEVELOPER/Contractor

DELIVERY DATE

BUILDING DESCRIPTION

525 Cane Island Pky

Northwest Outliers

673,785

0%

Oakmont Industrial Group

Jul-18

Spec Distribution

1302 Wharton Weems Blvd

East-Southeast Far

600,360

0%

Liberty Property Trust

Apr-18

Spec Distribution

Fallbrook Dr

North Fwy/Tomball Pky

600,000

100%

Hines

Jun-18

BTS Emser Tile

Cedar Port Distribution Park

East-Southeast Far

500,000

100%

Avera Companies

Sep-18

BTS Vinmar International

Northwest Logistics Center

West Outer Loop

411,442

0%

Stream Realty Partners, L.P.

Jun-18

Spec Distribution

Cutten Distribution Center I

North Fwy/Tomball Pky

293,280

0%

Clay Development

Jan-18

Spec Distribution

I-10 East & Thompson Rd

East-Southeast Far

294323

0%

Pontikes

Jun-18

Spec Distribution

Bayport South Business Park

10535 Red Bluff Rd

East-Southeast Far

257,835

0%

Johnson Development

Feb-18

Spec Distribution

Energy Commerce Bldg D

East-Southeast Far

232,960

0%

Clay Development

Feb-18

Spec Distribution

22533 NW Lake Dr

Northwest Outliers

231,839

0%

The Carson Companies

Mar-18

Spec Warehouse

5121 AmeriPort Pky Bldg VII

East-Southeast Far

203,840

100%

National Property Holdings

Apr-18

Palmer Logistics

  

Market Summary

Q4 2017 Houston Industrial Market Statistical Summary

Market

Rentable Area

Direct Vacant SF

Direct Vacancy Rate

Sublet Vacant SF

Sublet Vacancy Rate

Total

Vacant SF

Total Vacancy Rate

4Q17 Net Absorption

3Q17 Net Absorption

4Q17 Completions

3Q17 Completions

SF Under Construction

Houston Total

549,460,806

28,097,426

5.1%

1,648,586

0.3%

29,746,012

5.4%

135,652

3,538,679

607,956

2,165,570

6,375,868

 

 

 

 

 

 

 

 

 

 

 

 

 

CBD-NW Inner Loop

11,550,889

640,165

5.5%

57,205

0.5%

697,370

6.0%

(85,672)

(18,707)

-

-

14,250

Downtown

31,316,411

1,457,512

4.7%

-

0.0%

1,457,512

4.7%

(66,950)

241,178

-

-

-

North Inner Loop

4,858,519

257,215

5.3%

-

0.0%

257,215

5.3%

66,564

(76,388)

-

-

-

Southwest Inner Loop

7,084,063

63,376

0.9%

-

0.0%

63,376

0.9%

12,064

(13,999)

-

-

-

Inner Loop Corridor Total

54,809,882

2,418,268

4.4%

57,205

0.1%

2,475,473

4.5%

(73,994)

132,084

-

-

14,250

 

 

 

 

 

 

 

 

 

 

 

 

 

North Fwy/Tomball Pky

23,673,665

2,319,691

9.8%

36,455

0.2%

2,356,146

10.0%

131,408

991,305

11,200

875,800

937,180

North Hardy Toll Rd

33,602,530

2,435,141

7.2%

259,886

0.8%

2,695,027

8.0%

642,695

392,365

21,350

10,500

51,900

North Outer Loop

20,483,573

1,058,050

5.2%

14,560

0.1%

1,072,610

5.2%

10,629

91,146

23,645

-

-

The Woodlands/Conroe

17,584,277

1,171,601

6.7%

84,066

0.5%

1,255,667

7.1%

(135,373)

(62,614)

-

-

57,866

North Corridor Total

95,344,045

6,984,483

7.3%

394,967

0.4%

7,379,450

7.7%

649,359

1,412,202

56,195

886,300

1,046,946

 

 

 

 

 

 

 

 

 

 

 

 

 

Northeast Hwy 321

1,298,073

51,240

3.9%

-

0.0%

51,240

3.9%

(13,540)

-

-

-

-

Northeast Hwy 90

18,155,798

431,976

2.4%

20,026

0.1%

452,002

2.5%

(187,035)

28,239

-

-

164,500

Northeast I-10

4,008,645

158,427

4.0%

-

0.0%

158,427

4.0%

(91,302)

19,196

-

-

-

Northeast Inner Loop

11,443,833

384,409

3.4%

-

0.0%

384,409

3.4%

27,231

(17,461)

-

-

-

Northeast Corridor Total

34,906,349

1,026,052

2.9%

20,026

0.1%

1,046,078

3.0%

(264,646)

29,974

-

-

164,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Hwy 290/Tomball Pky

21,165,989

872,238

4.1%

245,319

1.2%

1,117,557

5.3%

127,429

629,922

-

-

171,550

Northwest Hwy 6

9,880,024

488,806

4.9%

-

0.0%

488,806

4.9%

(30,667)

81,539

28,325

-

133,160

Northwest Inner Loop

60,005,942

3,249,057

5.4%

112,604

0.2%

3,361,661

5.6%

(323,046)

(296,847)

-

-

19,000

Northwest Near

17,960,314

726,678

4.0%

66,021

0.4%

792,699

4.4%

(162,931)

(91,072)

-

-

154,661

Northwest Outliers

21,953,829

1,795,739

8.2%

21,335

0.1%

1,817,074

8.3%

(645,083)

1,053,275

-

983,750

935,319

West Outer Loop

25,459,071

1,349,308

5.3%

91,320

0.4%

1,440,628

5.7%

70,786

(129,537)

-

-

496,542

Northwest Corridor Total

156,425,169

8,481,826

5.4%

536,599

0.3%

9,018,425

5.8%

(963,512)

1,247,280

28,325

983,750

1,910,232

 

 

 

 

 

 

 

 

 

 

 

 

 

South Highway 35

34,872,626

945,609

2.7%

-

0.0%

945,609

2.7%

53,126

5,079

-

41,520

97,593

South Inner Loop

12,195,331

604,268

5.0%

86,318

0.7%

690,586

5.7%

(129,020)

9,833

-

-

-

South Corridor Total

47,067,957

1,549,877

3.3%

86,318

0.2%

1,636,195

3.5%

(75,894)

14,912

-

41,520

97,593

 

 

 

 

 

 

 

 

 

 

 

 

 

East I-10 Outer Loop

12,936,237

170,866

1.3%

-

0.0%

170,866

1.3%

(81,500)

-

-

-

-

East-Southeast Far

60,970,291

2,851,550

4.7%

341,900

0.6%

3,193,450

5.2%

1,111,798

598,935

512,900

154,000

3,071,511

Southeast Outer Loop

17,173,665

473,739

2.8%

15,000

0.1%

488,739

2.8%

(34,189)

93,176

-

-

-

Southeast Corridor Total

91,080,193

3,496,155

3.8%

356,900

0.4%

3,853,055

4.2%

996,109

692,111

512,900

154,000

3,071,511

 

 

 

 

 

 

 

 

 

 

 

 

 

Highway 59/Highway 90

22,645,199

1,448,144

6.4%

144,814

0.6%

1,592,958

7.0%

97,550

(119,096)

-

-

-

Southwest Far

12,543,739

1,172,429

9.3%

-

0.0%

1,172,429

9.3%

(37,513)

256,957

10,536

100,000

70,836

Southwest Outer Loop

13,400,895

807,002

6.0%

6,000

0.0%

813,002

6.1%

(164,895)

(39,855)

-

-

-

Sugar Land/Ft Bend Co

21,237,378

713,190

3.4%

45,757

0.2%

758,947

3.6%

(26,912)

(87,890)

-

-

-

Southwest Corridor Total

69,827,211

4,140,765

5.9%

196,571

0.3%

4,337,336

6.2%

(131,770)

10,116

10,536

100,000

70,836

 

 

2017Q4HoustonIndustrialImage

Photo Source: porthouston.com

 

Q4 2017 Houston Industrial Highlights

2017_Q4_Houston_Industrial_Infographic2