Q3 2014 | Houston Industrial | Market Report

by CoyDavidson on October 23, 2014

modern storehouse

Houston’s industrial market Q3 Net Absorption of 2.9M SF Pushes YTD Positive Net Absorption to 7.6M SF

Houston’s industrial market remains one of the healthiest in the U.S. primarily due to continued expansion in the oil and gas industry. It has accelerated Houston’s job growth, increasing demand for housing and home building supplies. Job growth has led to an increase in population and greater demand for goods and services. A significant part of the industrial leasing activity is tied to suppliers entering the Houston market or expanding existing facilities. Texas is expected to produce more oil and gas than all but one of the OPEC nations in 2014 due to the booming Eagle Ford Shale and Permian Basin plays, and Houston’s industrial real estate market will benefit from that rapidly increasing production.

During the third quarter, 2.9M SF of Houston’s industrial inventory was absorbed, pushing the year-to-date net absorption to a positive 7.6M SF. Industrial leasing activity, which includes renewals, reached 3.1M SF, almost 1.5M SF more than the totals for Q3 2013. 1.3M SF of new product delivered during the third quarter, pushing 2014 year-to-date deliveries to 6.9M SF. Additionally, 5.6M SF of industrial space is currently under construction. Houston’s average industrial vacancy rate decreased from 5.5% to 5.1% between quarters, and decreased from 5.3% over-the-year. The citywide average quoted industrial rental rate decreased 0.3% between quarters from $6.09 to $6.07 per SF NNN, and increased 3.6% on a year-over-year basis from $5.86 per SF NNN.

The Houston metropolitan area created 107,400 jobs between August 2013 and August 2014, an annual increase of 3.9% over the prior year’s job growth. Sectors creating the most jobs included professional, scientific, and technical services, health care and social assistance, and accommodation and food services. Houston’s unemployment rate fell to 5.4% from 6.3% one year ago. Houston’s industrial market remains one of the healthiest U.S. industrial markets, its continued expansion sustained primarily due to the growth in the oil and gas industry. Texas is expected to produce more oil and gas than all but one of the OPEC nations in 2014 due to the booming Eagle Ford Shale and Permian Basin, and Houston’s industrial real estate market will benefit from that rapidly increasing production.

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VACANCY & AVAILABILITY

Houston’s average industrial vacancy rate decreased 40 basis points from 5.5% to 5.1% between quarters, and decreased 20 basis points from 5.3% last year. At the end of the third quarter, Houston had 25.2M SF of vacant industrial space. Among the major industrial corridors, the Northeast Corridor has the lowest vacancy rate at 1.8%, followed by the Southern Corridor at 3.6% and then the Northwest Corridor at 3.9%. The largest concentration of vacancy is located in the North Corridor, with a 7.5% vacancy rate.

Houston’s industrial construction pipeline had 5.6M SF of projects underway at the end of the third quarter, the majority of them being spec development. The largest project under construction is a 650,000-SF build-to-suit distribution warehouse for ALDI, Inc., located on Highway 90A in the Sugar Land submarket. A list of buildings currently under construction can be found on Page 4 of this report.

RENTAL RATES

According to CoStar, our data service provider, Houston’s citywide average quoted industrial rental rate for all product types decreased 0.3% from $6.11 per SF NNN in the first quarter to $6.09 per SF NNN in the second quarter. According to Colliers’ internal data, actual lease transactions are in the $4.44 – $4.92 per SF NNN range for newer bulk industrial spaces, while flex rates are ranging from $6.60 to $9.00 per SF, depending on the allowance for tenant improvements and the location of the property. By property type, the average quoted NNN rental rates are as follows: $5.71 per SF for Warehouse Distribution space; $4.34 per SF for Bulk Logistics space; $10.11 per SF for Flex/Service space; with Tech/R&D space averaging $10.87 per SF, according to CoStar.

ABSORPTION & DEMAND

Houston’s industrial market posted 2.9M SF of positive net absorption in the third quarter, with the Northwest Corridor submarket contributing the largest amount, 876,689 SF, followed by the North Corridor which posted 650,605 SF. The Southeast Corridor posted 607,219 SF, and the Northeast Corridor had 322,929 SF of net positive absorption.

There were several major tenant move-ins contributing to net absorption gains in the third quarter including HD Supply Holdings, Inc. (497,867 SF), B&G Foods Inc. (267,170 SF), Consolidated Electrical Distributors, Inc. (206,644 SF), Team Alloys, LLC (136,928 SF), Freeman Decorating (90,067 SF), Freight Logistics Services USA Transport LLC (78,750 SF), Houston Furniture Bank (75,000 SF) and Elliott Electric Co. (67,742 SF).

Click here to download the full report as a PDF.

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