Houston Industrial Market Overview for Q2 2019

The Houston Industrial market currently has 15,200,000 square feet of space under construction which is almost a record high for the city. The Port of Houston and the largest petrochemical complex in the western hemisphere has pushed this area into becoming a serious player as a regional distribution center. We are seeing 6.3% vacancy rates and 2.6% twelve-month rental growth.

The largest industrial sectors in Houston are e-commerce, logistics, and plastics which caused a rise in industrial demand. Cap rates are nearing a record low of 6.6% due to investor demand in Third Quarter 2019, and we don’t see any signs of slowing.

Lease Opportunities in Houston’s Industrial Market

Houston is seeing a historically low vacancy rate average of 6.3% but will continue to increase slightly with new supply set for delivery. Demand from plastics, petrochemicals, and e-commerce has created the need for industrial real estate along with port-related trade. Let’s take a look at the top five industrial leases in the past 12 months:

  1. Home Depot leased 770,640 SF in Submarket Hwy 290/Tomball Parkway
  2. Valvoline leased 472,564 SF in Submarket East-Southeast Far
  3. Goodman Manufacturing leased 411,442 SF in Submarket West Outer Loop
  4. Cameron International Corp leased 351,672 SF in Submarket North Freeway/Tomball Parkway
  5. Plantgistix leased 337,040 SF in Submarket East-Southeast Far

We expect the industrial vacancy rate to bump up to 7% by mid-2023 due to the sheer amount of real estate that is expected to deliver over the next couple of years along with a national slowdown in economic growth. Once the real estate is absorbed we could see another compression and vacancy rates drop.

Asking Rents for the Houston Industrial Market

Rental rates in Houston are about average when we compare to the major U.S. metro markets. Asking rents are up 2.6% for 2019 and have risen about 20% this cycle due to e-commerce and the petrochemicals industry. Below are the submarkets with the highest and lowest rents as of 19Q3.

High Rates

  • Southwest Inner Loop at $9.50/SF
  • Northwest Highway at $9.50/SF
  • The Woodlands/Conroe at $9.40/SF

Low Rates

  • Downtown Houston at $5.50/SF
  • Southeast Outer Loop at $5.30/SF
  • Northeast Inner Loop at $5.10/SF

We see rent growth keeping up with inflation and staying attractive to developers and investors seeking more land for industrial space. One aspect to note in the next couple years, a large supply of space will be delivered and rental growth may take a hit due to absorption.

Construction

With 15,200,000 SF of industrial properties under construction Houston ranks fifth in the country for development. 95 million square feet of space has been delivered in this cycle which has greatly expanded Houston’s inventory by almost 20%. We are seeing a mix of build-to-suits for large companies being built and also speculative developments. Below are some of the largest buildings under construction.

Currently Under Construction:

  • Coca-Cola Southwest at Fallbrook Dr. – 1,000,000 SF building with expected delivery February 2020.
  • Air 59 Logistics Center at Highway 59 & Will Clayton Parkway – 685,400 SF building with expected delivery November 2019.
  • 10591 Red Bluff Road – 643,000 SF building with expected delivery March 2020.

Development activity is currently centered around the southeastern and northwestern corners of Houston with three standout submarkets seeing new development.

  • North Freeway/Tomball Parkway – 3 Million SF of Space
  • East-Southeast Far – 2.4 Million SF of Space
  • Northwest Outliers – 2.2 Million SF of Space

Sales Activity in Houston

Houston is currently ranked in the top 20 industrial markets in the U.S. for investment sales as of third quarter 2019. We know of $1.2 billion in confirmed transactions with over 500 deals done so far in 2019. Large portfolio deals have been the most common transactions that are taking place among investors and 2018 saw 1,300 industrial sales take place. Average price per square foot is $76.00 with an average capitalization rate of 7%. Below are some of the most significant sales in the past twelve months.

  • 7909 Northcourt Road – Sold for $61,619,859 ($96/SF) with a sale date of 9/12/2018
  • 636 Highway 90 – Sold for $48,000,000 ($87/SF) with a sale date of 11/1/2018
  • 5000 Interstate 10 – Sold for $45,000,000 ($48/SF) with a sale date of 8/20/2018

One unique aspect to take into consideration when looking at the Houston industrial real estate market is a relatively easy permitting process, an abundance of land in the north and west of Houston, and lack of zoning has all played a part in industrial growth. Houston is also the 5th largest metro area in the United States with 83,000 jobs added in the past 12 months. Overall the industrial market is strong in Houston and investors and developers have taken notice. We have brokers that can advise you on the best real estate strategy for your business, whether it’s in manufacturing or logistics we can help you find space, contact CXRE today!

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