Houston Industrial Market Report | Q4 2016

by CoyDavidson on January 23, 2017

Houston’s industrial market ends 2016 on a positive note

During the final quarter of 2016, 1.9 million SF of Houston’s industrial inventory was absorbed, substantially less than the 6.3 million SF absorbed in the third quarter. However, 3.9 million SF of the space that was absorbed in the previous quarter was a result of one tenant, Daiken occupying a massive new facility. Industrial leasing activity decreased between quarters, dropping from 4.3 million SF to 3.2 million SF.

The average vacancy rate increased 10 basis points over the quarter from 5.5% to 5.6%. About 70.0% of the 2.3 million SF of new space delivered in Q4 2016 was pre-leased, and 78.0% of the 5.2 million SF currently under construction is pre-leased. More than 2.4 million SF of the 5.2 million SF currently under construction is located in the East-Southeast Far submarket, where the Houston Ship Channel and the Port of Houston are located.

The average citywide quoted industrial rental rate increased 3.3% on a quarterly basis from $6.87 per SF NNN to $7.10 per SF NNN.

According to the U.S. Bureau of Labor Statistics, the Houston metropolitan area created 13,400 jobs (not seasonally adjusted) between October 2015 and October 2016. Most of the job growth occurred in government, retail trade, education and healthcare, trade, transportation and utilities, and professional services.

VACANCY & AVAILABILITY

Houston’s average industrial vacancy rate increased from 5.5% to 5.6% over the quarter and increased by 60 basis points over the year from 5.0% in Q4 2015. At the end of the fourth quarter, Houston had 28.6 million SF of vacant industrial space for direct lease and an additional 1.6 million SF of vacant sublease space. Among the major industrial corridors, the Northeast Corridor has the lowest vacancy rate at 2.7%, followed by the South Corridor at 3.5%, and then the Northwest and Southeast Corridors, both at 5.2%. The largest percentage of vacant space is located in the North Corridor, which has a 9.0% vacancy rate.

Houston’s industrial construction pipeline had 5.2 million SF of projects underway at the end of the fourth quarter. 32.7% of this space is spec development and is not pre-leased. The largest project under construction is the 800,000 SF build-to-suit FedEx distribution center located on the newly opened Grand Parkway in northwest Harris County.

INDUSTRIAL RENTAL RATE AND VACANCY PERCENTAGE

ABSORPTION & DEMAND

Houston’s industrial market posted 1.9 million SF of positive net absorption in the fourth quarter, with the Southeast Corridor contributing the largest share at 1.3 million SF, followed by the Northwest Corridor which posted 0.9 million SF of absorption. The Southwest Corridor followed with 105,522 SF of absorption. The remaining submarkets posted negative net absorption, the largest amount was in the Inner Loop Corridor, which added 199,426 SF to the market availability.

There were several major tenant move-ins contributing to net absorption gains in the fourth quarter, including IKEA (495,460 SF), XPO Logistics (115,300 SF) and Air Liquide (83,000 SF), all in the East-Southeast Far submarket.

RENTAL RATES

According to CoStar, our data service provider, Houston’s citywide average quoted industrial rental rate for all product types increased over the quarter from $6.87 per SF NNN to $7.10 per SF NNN. According to Colliers’ internal data, actual lease transactions are in the $4.56 per SF – $5.04 per SF NNN range for newer bulk industrial space, while flex rates range from $7.20 per SF to $10.80 per SF depending on the existing improvements or the allowance provided for tenant improvements, and the location of the property.

According to CoStar, the average quoted NNN rental rates by property type are as follows: $6.78 per SF for Warehouse Distribution space, $11.44 per SF for Flex/Services space, with Tech/R&D space averaging $12.69 per SF.

LEASING ACTIVITY

Houston’s industrial leasing activity decreased 25.7% over the quarter from 4.3 million SF in Q3 2016 to 3.2 million SF. The table below highlights some of the larger transactions that occurred in Q4 2016.

▸ Click here to download the report as a PDF.

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