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Houston Industrial Market Report (Q4 2020)4 janv. 2021
The industrial market in Houston closes out the year as the dominant commercial real estate sector – just like it has been throughout the last 12 months. Record-level construction including large spec properties has been at the forefront to fulfill the rising demand for online shopping brought on by the global pandemic.
Despite the lingering challenges spurred by the pandemic and oil price lows that energy firms and oil field services face, increased activity during the last half of the year at the Port of Houston has generated confidence for a recovering economy. Rated again as the top port in terms of total waterborne tonnage, foreign waterborne tonnage and number of vessel transits, the Port of Houston moved more than 47 more million tons of cargo than any other U.S. port. The almost 285 million tons moved through the Port in 2019 represented a 6% increase compared to the previous year.
Online shopping remains strong, benefiting Houston’s industrial sector and creating demand for both new distribution centers and warehouses along with last-mile facilities to get closer to the consumer. Large national retailers along with Amazon and other delivery firms are busy expanding their presence in the region; several larger deals are in properties near the Port.
Metro Houston has recovered about half of all jobs lost during the pandemic as of October with a backdrop of potential layoffs in the energy sector. The region’s November unemployment rate jumped to 8.9% from 7.7% in October, according to the Texas Workforce Commission.
The Greater Houston Partnership (GHP) predicts the region will experience its usual seasonal job losses through January. The group’s employment forecast reported projected growth of 35,000 to 52,000 new jobs, with most growth resuming in the second half of the year. Every sector will register job growth except energy and retail, the GHP noted, with the following sectors creating the most jobs: administrative support services, health care and social assistance, manufacturing and professional services.
Absorption & Demand
Direct net absorption surged back to 3 msf during fourth quarter, almost tripling the third quarter’s absorption and extending a multi-year positive trend. For the year, direct net absorption totaled 10.8 msf, the largest annual amount since 2016 and 23% more than 2019.
Two facilities in Katy in the Northwest sector topped the list for largest completed during fourth quarter. Medline’s 1.3 msf in Pederson Distribution Park is the healthcare manufacturer’s new distribution center, using 70% of the facility and offering 390,000 sf for lease. Amazon opened its latest 805,601-sf distribution center in Clay 99 Business Park also in Katy, while Katoen Natie occupied its new 604,800-sf property in the Southeast.
The two largest properties completed resulted in the Northwest sector recording the highest absorption,1.7 msf, during the fourth quarter, followed by 688,354 sf of positive absorption in the Southeast and 655,653 sf in the Southwest.
Industrial leasing activity jumped to 6.3 msf during the fourth quarter, ending the year with 24.1 msf, slightly below the previous year’s 29.5 msf. The largest deal of the quarter is Lowe’s 1.5-msf lease for a regional distribution center in New Caney in the Northeast. Two larger deals in the Southeast include Dunavant Distribution Group’s 784,000-sf consolidation deal at Bay Area Business Park and Costway’s new 402,648 sf in Underwood Port Logistics Center. HEB rounded out the top four with a renewal of 401,280 sf at 4501 Blalock in the Northwest.
Vacancy & Availability
The large number of unoccupied deliveries has been responsible for the vacancy rate hikes during the year, but fourth quarter’s direct vacancy rate of 7.9% remained constant although higher than the 5.9% year-over-year. Vacancy rates for warehouse/distribution space dropped marginally to 8.8% from 8.9% last quarter, but up from 6.4% year-over-year. Both manufacturing and flex space remained within 20 basis points, with manufacturing space increasing to 3.5% and flex decreasing to 9% in fourth quarter. Of the submarkets, the CBD/Inner Loop sector is boasting the lowest vacancy of 4.3% while the North is currently posting the highest vacancy of 9.5%.
Deliveries during fourth quarter increased to 24 properties with 5.4 msf added to the existing market, a slower pace than first-quarter’s record-breaking 10 msf. Completed in all of 2020 was 26.5 msf of industrial space, a record level 42% more than last year’s previous record of 15.4 msf. All 160 deliveries during 2020 are collectively 49% available and 57% vacant at year-end.
Available space is also up; this category includes all space that could be leased but may or may not be vacant. Overall direct availability is at 12.9%, up from 12.3% last quarter and up from 8.4% during the same period last year.
Available sublease space increased minimally to 5.6 msf from 5.4 msf the previous quarter. Three sectors are offering more than 1 msf each representing 76.6% of all sublease space available. The North sector has 1.7 msf available, the Northwest has 1.4 msf available and the Southeast 1.2 msf.
Although decreasing to 12.4 msf in 57 buildings, Houston’s construction pipeline remains larger than many cities after posting record starts in fourth quarter 2019. The metro has been cited for its large new supply, averaging 13.3 msf of construction during the last six years.
Two of the three largest projects underway are build-to-suit (BTS) representing about 25% of the total. Ross Distribution Center in the Southwest is the largest BTS project at 2.2 msf and is scheduled for completion in February 2021. Amazon’s latest 850,000-sf project in Richmond is scheduled for completion in April 2021.
The two submarkets with the most square footage underway account for 69% of the total: the Southwest with 6.2 msf and the Southeast with 2.3 msf. The Northwest sector has 1.8 msf and the North has 1.5 msf underway.
The overall asking average rental rate for all industrial space during fourth quarter decreased to $7.33 per square foot (psf) triple net (NNN) from $7.50 psf last quarter, which is the highest average recorded. Depending on asset quality, institutional distribution space is often quoted at $5.40 psf triple net. Flex space rents range from $8.40 to $12.00 psf triple net and manufacturing from $7.00 to $8.40 psf triple net. Concession packages are being offered more frequently with up to 10-month rent abatements on long-term deals along with allowances covering the major cost of tenant improvements.