Houston’s Industrial Market Adds 2.5M SF of New Inventory In First Half of 2013 – Vacancy Remains at 5.0%
Houston’s industrial market remains one of the top ten healthiest U.S. industrial markets because of its low vacancy, stable rental rates, and positive absorption. Houston posted 336,000 SF of positive net absorption in the second quarter, bringing year-to-date net absorption to 2.6M SF. Industrial leasing activity reached 3.3M SF, mostly due to large renewals. Houston’s average industrial vacancy rate increased from 5.0% to 5.1% between quarters and decreased by 30 basis points over the year. The overall average quoted industrial rental rate increased by only one cent, from $5.71 to $5.72 per SF NNN between quarters, and increased by 4.2% on a year-over-year basis from $5.49 per SF NNN in second quarter 2012.
Houston’s lack of available industrial inventory has spurred demand for new product. Developers have responded and currently have 4.3M SF under construction. Some of the increased activity has been driven by build-to-suit projects for companies expanding in or relocating to the Houston market; however, most of the space under construction is spec developments (4.0M SF). As Houston’s available industrial inventory shrinks, we believe the increasing demand for new product will continue to spur both build-to-suit and spec development.
The Houston metropolitan area added 91,600 jobs between May 2012 and May 2013, an annual increase of 3.4% over the prior year’s job growth. Further, Houston’s unemployment fell to 6.4% from 6.8% one year ago, while Houston area home sales increased significantly, growing by 28.0% over the year. With continued expansion in the energy industry, Houston’s economy is expected to remain healthy for both the near and long-term.
Vacancy & Availability
Although 1.0M SF of new inventory delivered during the second quarter, Houston’s industrial vacancy rate increased from 5.0% to 5.1% between quarters. The average industrial vacancy rate decreased by 30 basis points from 5.4% reported in second quarter 2012.
At the close of the second quarter, Houston had 24.5M SF of vacant industrial space citywide, 700K SF more than the previous quarter. Among the major industrial corridors, the Southeast Corridor has the largest amount of vacant space with 5.2M SF (6.7% vacancy), followed by the North Corridor with 4.7M SF vacant (6.4% vacancy), the Northwest Corridor with 4.4M SF vacant (3.4% vacancy), and the Southwest Corridor with 3.7M SF vacant (5.8% vacancy).
Houston’s industrial construction pipeline had 4.3M SF of projects underway at the end of the second quarter, including 4.0M SF of spec development. The largest project under construction is a 3-building, 611,000-SF spec distribution warehouse complex located in North Houston at Imperial Valley Dr. and FM 1960, near George Bush Intercontinental Airport. A list of additional buildings currently under construction can be found on Page 4 of this report. The largest build-to-suit project in the pipeline is a 181,900-SF office/warehouse located on Central Green Boulevard in North Houston. GAC Energy & Marine Services will occupy the building which will be completed in third quarter 2013.
Houston’s overall average quoted industrial rental rate increased from $5.71 to $5.72 per SF NNN in the second quarter, and increased by 4.2% on a year-over-year basis from $5.49 per SF NNN. By property type, the average quoted NNN rental rates are as follows: $5.38 per SF for Distribution space; $4.44 per SF for Bulk Logistics space; $8.10 per SF for Flex/Service space; with Tech/R&D space averaging $10.77 per SF.
Absorption & Demand
Houston’s industrial market posted 336,000 SF of positive net absorption in the second quarter, bringing the 2013 year-to-date positive net absorption total to 2.6M SF. The Northwest and Inner Loop Corridor submarkets outperformed all others in the second quarter, posting the largest positive net quarterly absorption of 408K SF and 248K SF respectively.
There were several major tenant move-ins contributing to net absorption gains in the second quarter, including Deep Down, Inc. (215,000 SF); Mattress One (46,800 SF); Office Pavilion (44,000 SF); Aluminum Screen Manufacturers, Inc. (40,600 SF); and Utilitech Power.
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