Houston Industrial Market Report – 4Q 2011

by CoyDavidson on January 23, 2012

2.9M SF in Houston’s Industrial Construction Pipeline – 1.8M SF is Spec Development

Houston’s industrial market fundamentals continue to strengthen with over 1.5M SF of positive net absorption in the fourth quarter, pushing year-end absorption to 4.4M SF. Houston’s industrial vacancy continues to decrease, averaging 5.2% in the fourth quarter, 40 basis points (bps) less than the previous quarter, and 100 bps below the 6.2% recorded in the same quarter last year. Houston’s overall average quoted industrial rental rate increased from $5.41 to $5.45 per SF NNN between quarters increasing by 2.3% on a year-over-year basis from $5.33 per SF NNN. Year-to-date leasing activity reached 13.1M SF with the help of large lease transactions.

For several years now developers have shown restraint due to the economic downturn; however, construction activity has increased in 2011. Houston’s industrial market currently has 2.9M SF in the construction pipeline and delivered 1.7M SF in 2011. Much of the increased activity in the first half of the year was driven by build-to-suit projects for companies expanding in and relocating to the Houston market, however, the fourth quarter saw a significant increase in spec development, 1.8M SF of the 2.9M under construction. As Houston’s available industrial inventory shrinks, we believe the demand for new projects will continue to increase, both build-to-suit and spec development.

With solid expansion in the energy sector and a strong housing market, (up 4.1% year-to-date through November), Houston’s economy is expected to continue outperforming the national economy over the next twelve to eighteen months.

Vacancy & Availability

Houston’s industrial vacancy continues to shrink averaging 5.2% vacancy in the fourth quarter, 40 basis points (bps) less than the previous quarter, and 100 bps below the 6.2% recorded in the same quarter last year. Over the past three years, Houston’s industrial vacancy has decreased, outperforming all other commercial real estate property sectors citywide.
At the end of the fourth quarter, Houston posted 26.3M SF of vacant industrial space citywide, 1M SF less than the previous quarter. Among the major industrial corridors, the Northwest held the largest amount of vacant space with 6.1M SF (5.1% vacancy), followed by the Southeast with 4.9M SF vacant (5.7% vacancy), the North with 4.3M SF vacant (6.0% vacancy), and the Southwest with 4.2M SF vacant (6.1% vacancy).

Houston’s industrial construction pipeline significantly increased between quarters from 1.0M SF to 2.9M SF, and 1.8M SF of that is spec development. The largest project under construction is a 475,000 SF state-of-the-art foodservice distribution facility that will be the new Gulf Coast region distribution hub for the Ben E. Keith Company. The facility is being constructed on an 82 acre tract located in Missouri City in the Beltway Crossing Business Park.

Rental Rates

Houston’s overall average quoted industrial rental rate increased from $5.41 to $5.45 per SF NNN between quarters, and increased by 2.3% on a year-over-year basis from $5.33 per SF NNN. By property type, the average quoted NNN rental rates are as follows: $5.17 per SF for distribution space; $4.19 per SF for bulk warehouse space; $6.36 per SF for Flex/Service space; and Tech/R&D stood at $7.13 per SF.

Absorption & Demand

Houston’s industrial market posted 1.5M SF of positive net absorption in the fourth quarter, bringing the year-to-date total to 4.4M SF. Among Houston’s major industrial corridors, the Northeast and Northwest submarkets outperformed all others in the fourth quarter posting the highest positive net quarterly absorption of 515K SF and 295K SF, respectively. The North submarket followed with 227K SF.

There were several major tenant move-ins contributing to net absorption gains in the fourth quarter, including Excel Inc. (191,537 SF); Chemplast Inc. (175,000 SF); Del Papa Distributing (98,599 SF); Velocity Express(60,000 SF); and Consolidated Container Company of Texas, LLC (93,170SF).

Leasing

Houston’s industrial leasing activity reached 3.4M SF in the fourth quarter, 200K SF less than the previous quarter and 900K SF more than what was recorded in the same quarter last year. For a select list of Houston’s top industrial leases signed to date, please see the full report.

View and download the full report here.

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