Houston Industrial Real Estate Report 3Q-2011

by CoyDavidson on October 25, 2011

Houston Industrial Property Market Continues to Strengthen

The market fundamentals in the Houston industrial real estate market continue to strengthen with over 981K SF of positive net absorption in the third quarter, pushing year-to-date absorption to 3.2M SF. Houston’s industrial vacancy continues to decrease, averaging 5.6% in the third quarter, 10 basis points (bps) less than the previous quarter, and 70 bps below the 6.3% recorded in the same quarter last year. The overall average quoted industrial rental rate increased from $5.34 to $5.41 per SF NNN between quarters increasing by 2.7% on a year-over-year basis from $5.27 per SF NNN. Year-to-date leasing activity reached 9.9M SF with the help of several  large lease transactions.

Houston is once again making headlines as one of the stronger industrial real estate markets in the nation. In its July/August 2011 issue, Business Facilities listed Houston as a “Top 10 Manufacturing City”. Houston’s strategic location and core strengths, including an expanding energy sector, strong import/export trade activity, cutting-edge medical advancements, and technological breakthroughs across industries, uniquely position it to play a vital role in meeting national and global market demands in the near and far term.

For several years now developers have shown restraint due to the economic downturn; however, construction activity has increased in 2011. The Houston industrial real estate market currently has 951K SF in the construction pipeline and has delivered 1.5M SF year-to-date. Much of the increased activity was driven by build-to-suit projects for companies expanding in and relocating to the Houston market. As the available inventory shrinks in the Houston industrial market, we believe the demand for new projects will continue to increase.

Houston Industrial Real Estate Market

Vacancy & Availability

Industrial property vacancy in Houston continues to shrink averaging 5.6% vacancy in the third quarter, 10 basis points (bps) less than the previous quarter, and 70 bps below the 6.3% recorded in the same quarter last year. Over the past two years, Houston’s industrial vacancy has steadily decreased, outperforming all other commercial real estate property sectors citywide.

At the end of the third quarter, Houston posted 27.3M SF of vacant industrial space citywide. Among the major industrial corridors, the Northwest held the largest amount of vacant space with 6.9M SF (5.1% vacancy), followed by the Southeast with 5.2M SF vacant (6.1% vacancy), the Southwest with 4.4M SF vacant (6.5% vacancy), and the North with 4.3M SF vacant (5.9% vacancy).

The Houston industrial real estate market currently has 951,300 SF in the construction pipeline. The largest project under construction is a 475,000 SF state-of-the-art food service 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 $5.34 to $5.41 per SF NNN between quarters, and increased by 2.7% on a year-over-year basis from $5.27 per SF NNN. By property type, the average quoted NNN rental rates are as follows: $5.18 per SF for distribution space; $4.26 per SF for bulk warehouse space; $7.04 per SF for Flex/Service space; and Tech/R&Dstood at $8.59 per SF.

Absorption & Demand

Houston’s industrial property market posted 981,530 SF of positive net absorption in the third quarter, bringing the year-to-date total to 3.2M SF.

Among Houston’s major industrial corridors, the North and Southwest submarkets outperformed all others in the third quarter posting the highest positive net quarterly absorption of 483K SF and 423K SF, respectively. The Northwest submarket followed with 224K SF.

Leasing

Leasing activity in the Houston industrial real estate market reached 3.4M SF in the third quarter, 300K SF less than the previous quarter and 600K SF less than what was recorded in the same quarter last year.

Sales Activity

Investment activity in the industrial real estate market decreased slightly between quarters, with 50 properties trading in the third quarter compared to 55 in the second quarter. The most significant transaction was Cotton Companies’ 91,000 SF, Class B Industrial Warehouse, which sold to Par-Pak, Inc. for $55 per SF. The building, located at 14345 Northwest Freeway in the Northwest Inner Loop Industrial submarket, will be owner occupied by Par-Pak, Inc. after Cotton relocates to their new corporate headquarters in Katy.

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