Houston Industrial Vacancy Continues to Shrink

by CoyDavidson on April 18, 2011

Houston Industrial Market Report | 1Q 2011

Houston’s industrial market fundamentals continue to strengthen, adding 531,985 SF of positive net absorption in the first quarter, an improvement from the positive net absorption of 354,079 SF recorded in fourth quarter 2010. In addition, Houston’s industrial vacancy decreased slightly by 20 basis points to 6.0% from 6.2% the previous quarter. The quoted citywide rental rate for industrial space decreased slightly by 0.4% between quarters from $5.33 to $5.31 per SF NNN, but increased by 8.1% on a year-over-year basis from $4.88 per SF NNN. On the leasing front, three leases over 100,000 SF were signed during the first quarter, with the majority of the  leases signed for 40,000 SF or less. For several years now developers have shown restraint due to the economic downturn; however, first quarter 2011 saw increased construction activity.  Houston’s industrial construction pipeline increased to 723,801 SF from 207,000 SF the previous reported in the previous quarter.

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.

Absorption, New Supply & Vacancy Rates

Vacancy & Availability

Houston’s industrial market averaged 6.0% vacancy in the first quarter, 20 basis points (bps) less than the previous quarter, and 60 bps below the 6.6% recorded in the same quarter last year. Over the past six quarters, Houston’s industrial vacancy has decreased, outperforming all other commercial real estate property sectors citywide.

At the end of the first quarter, Houston posted 29.1M SF of vacant industrial space citywide. Among the major industrial corridors, the Northwest held the largest amount of vacant space with 7.2M SF (5.4% vacancy), followed by the Southeast with 5.8M SF vacant (6.9% vacancy), the Southwest with 4.8M SF vacant (7.2% vacancy), and the North with 4.7M SF vacant (6.7% vacancy).

Houston’s industrial construction pipeline increased to 723,801 SF from 207,000 SF the previous reported in the previous quarter. The largest project under construction is a 300,000 SF multi-tenant office/warehouse in the West Outer Loop Ind submarket scheduled for delivery April 2011. The project is being developed by Duke Realty and is pre-leased by Ram Chemical & Supply and Berlin Packaging.

Rental Rates

Houston’s average quoted industrial rental rates decreased slightly by 0.4% between quarters from $5.33 to $5.31 per SF NNN, and increased by 8.1% on a year-over-year basis from $4.88 per SF NNN. By property type on a year-over-year basis, warehouse distribution space is $5.01 NNN/SF (up $0.11/SF) and flex space stood at $6.95 NNN/SF (down $0.97/SF).

Absorption & Demand

Houston’s industrial market posted positive net absorption of 532K SF in the first quarter, an improvement over the positive net absorption of 354K SF in the previous quarter. This marked the seventh consecutive quarter of gains.

Among Houston’s major industrial corridors, the Northwest and Southeast outperformed other industrial sectors in the first quarter. The Northwest posted the highest positive net quarterly absorption with 661K SF, followed by the Southeast with 360K SF. The Southwest followed with positive net quarterly absorption of 100K SF.

There were several major tenant move-ins contributing to net absorption gains in the first quarter. Several of those tenants are: Sysco moved into the former HP campus on Hwy 290 in Cypress (669,102 SF) and American Packing & Crating moved into 140,782 SF on N Witter St.

Leasing Activity

Houston’s industrial market recorded twenty-one (3) leases over 100,000 SF in the first quarter. The majority of the leases singed during were less than 40,000 SF. Overall, industrial leasing activity reached 2.6M SF in the first quarter, 2.0M SF less than the previous quarter and 2.5M SF less than what was recorded in the same quarter last year.

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