Houston Industrial Market Report | 4Q 2010
Houston’s industrial market fundamentals continue to strengthen, adding 354,079-SF of positive net absorption in the fourth quarter bringing the year-to-date total to 4.8M SF, a huge improvement from the positive net absorption of 1.7M SF recorded in 2009. Vacancy also posted a slight gain with the citywide average at 6.2% in the fourth quarter, down from 6.7% at this time last year. The quoted citywide rental rate for industrial space increased by 8.5% over the same period last year. On the leasing front, twenty leases over 100,000 SF were signed in 2010, with six leases over 200,000 SF. A significant boost to the market’s stabilization has been disciplined curtailment of new speculative construction activity, with only 206,671 SF in the construction pipeline at the close of 4Q10, compared to 1.3M SF under construction at this time last year.
Looking forward, Houston’s industrial sector is expected to improve moderately as key economic drivers move towards recovery. The Port of Houston has been instrumental in Houston’s development as a center of international trade. Over 100 steamship lines offer service linking Houston with 1,053 ports in 203 countries. It is also home to a $15 billion petrochemical complex, the largest in the nation and second largest worldwide. Looking forward, The Port of Houston Authority will host the American Association of Port Authorities annual convention in 2014, which will coincide with the 100th anniversary celebration of the official opening of the Houston Ship Channel.
Macro factors driving the absorption of industrial space ultimately ties back to job count. According to the Texas Labor Market Review, total non-agricultural employment in Texas rose by 19,100 jobs in November, gaining jobs in eight out of eleven months. At the local level, Houston’s MSA had the largest monthly job increase, with 10,900 jobs added in November. Dallas followed with 5,200 jobs added. Houston also led in the monthly growth of retail and government jobs, adding 7,400 and 2,300 jobs, respectively.
Houston Industrial Market | 4Q 2010
Vacancy & Availability
Houston’s industrial market averaged 6.2% vacancy in the fourth quarter, 20 basis points (bps) less than the previous quarter, and 70 bps below the 6.9% recorded in the same quarter last year. Over the past nine quarters, Houston’s industrial market has consistently maintained vacancy levels below 10% for all major corridors, outperforming all other commercial real estate property sectors citywide.
At the end of the fourth quarter, Houston posted 29.6M SF of vacant industrial space citywide. Among the major industrial corridors, the Northwest held the largest amount of vacant space with 7.9M SF (6.1% vacancy), followed by the Southeast with 6.1M SF vacant (7.6% vacancy), the Southwest with 4.5M SF vacant (7.2% vacancy), and the North with 4.3M SF vacant (6.5% vacancy).
Developers have continued to show restraint to current market conditions by halting major speculative industrial construction projects in Houston, leaving only 206,671 SF in the construction pipeline at the end of the fourth quarter. The largest project under construction is a 52,400-SF multi-tenant office/warehouse in the North Hardy Toll Rd submarket scheduled for delivery March 2011. Speculative construction is expected to remain limited over the next 6 to 12 months.
Houston’s average quoted industrial rental rates increased by 1.0% between quarters, and fell by 6.0% on a year-over-year basis. The overall $5.33 NNN/SF in the fourth quarter fell from $5.65 NNN/SF at this time last year. By property type on a year-over-year basis, warehouse distribution space was $4.67 NNN/SF (up $0.40/SF) and flex space stood at $7.91 NNN/SF (up $0.34/SF).
Absorption & Demand
Houston’s industrial market posted positive net absorption of 354K SF in the fourth quarter, an improvement over the positive net absorption of 200K SF in the same quarter last year. This marked the fifth consecutive quarter of gains, bringing the year-to-date positive net absorption to 4.8M SF. By comparison, the annual net absorption for all four quarters of 2009 was 1.8M.
Among Houston’s major industrial corridors, the Northwest and Southwest outperformed other industrial sectors at year-end 2010. The Northwest posted the highest positive net year-end absorption with 2.3 SF, and 1.5M SF. The North followed with positive net year-end absorption of 1.2M SF.
There was only one major tenant move-in contributing to net absorption gains in the 4th quarter, Val-Fit Inc. moved into 170,017-SF (Northeast).
Houston’s industrial market recorded twenty (20) leases over 100,000 SF – including six (6) leases over 200,000 SF during 2010. The majority of the leases singed during 4Q10 were less than 50,000 SF. Overall, industrial leasing activity reached 2.5M SF in the fourth quarter, 2.0M SF less than the previous quarter and 3.5M SF less than what was recorded in the same quarter last year.
Houston’s industrial investment activity remained sluggish during the 4th quarter adding only 22 sales to the 87 sale year-end total which totaled $1.1B in total volume. The combined total of 15.1 MSF had an average sales price of $102/SF. Although owner/user industrial properties less than 35,000 SF continued to account for the majority of transactions to date, there were some larger Q4 sales that included:
- Duke Realty acquired the 356,000-SF Barbour’s Cut Business Park and the 226,240-SF Bayport Container Terminal located in La Porte and Seabrook, Texas, respectively, from Granite Properties. The two-property sale is rumored to have sold for $82/SF.
- Wilsonville Holiday Partners LLC acquired the 88,500-SF Westgreen Business Center located in Katy, Texas from for $70/SF.
DCT Industrial Trust purchased a 51,959-SF distribution warehouse located at 16303 Air Center Blvd. from The National Realty Group for $52/SF.
- LT Foods USA purchased 39,000-SF distribution center located at 14511 Fairway Pines Dr. in the Lakeview Business Park from Crow Holdings for $64/SF.