"We expect user demand in SE Texas to remain very strong in the industrial market as re-shoring and supply chain adjustments accelerate. While there are many storm clouds on the horizon, we expect 2022 to be a solid year for industrial real estate in Houston and SE Texas."
Patrick Duffy | President of Colliers in Houston
- Robust leasing activity
- Positive net absorption
- Vacancy drops
- Rental rates increase
- Cap rates continue to compress
Houston’s Industrial market continued to gain momentum as leasing velocity reached 10 million square feet in the first quarter. The increase in demand for space continued to spur new development with over 18 million square feet under construction and an additional 65 million square feet proposed or in the final planning stage. Houston’s industrial market recorded 5.6 million square feet of positive net absorption in the first quarter. The vacancy rate decreased 220 basis points annually from 8.7% in Q1 2021 to 6.5% in Q1 2022.
The forecast in the above graph is based on a trailing 4-quarter historical average.
Houston’s Industrial market shows no signs of letting up even after a record high 2021 performance. With Q1 2022 leasing activity of 10 million square feet and net absorption of 5.6 million square feet, the market remains on pace to match or exceed 2021. Vacancy fell below 7%, to 6.5%, for the first time since 2019. Traditionally not known for significant rent growth, Houston has seen a 10-15% increase in market rents which we expect to continue through 2022.
On the capital markets side, institutional equity remains extremely strong, and competition among buyers appears to be steadily increasing. Capitalization rate compression (the gap between the Cap rate and the 10-yr Treasury rate) has been experienced across all submarkets as the demand for investment product has exceeded supply. Institutional equity is getting aggressive on properties with shorter weighted-average lease terms so they can realize new inflated lease rates sooner which provides a hedge against inflation. A primary driver of the record low cap rates on stabilized product is the yield on cost modeling approach these institutions are taking by incorporating expected higher rental rates at renewal/expiration.
We fully anticipate 2022 will be a strong growth year. Market activity and demand remain strong however there are a handful of factors to keep an eye on moving forward. Inflation is the highest it has been in 40 years and has hit construction materials especially hard. It is widely expected that the Federal Reserve will aggressively increase interest rates in the mid-term to attempt to slow inflation and borrowing costs will be substantially higher than we have experienced over the past decade. Increased construction pricing and record land prices will impact both developers with planned developments and users that prefer to own. Despite these higher delivery costs, there is approximately 18 million square feet under construction and even more in the planned construction pipeline.
Institutional Inventory - 450,000 SF or Greater
||Submarket||RBA||% Leased/Owned||Est. Delivery Date||Developer/Owner|
| Weiser Business Park
||Northwest Hwy 6||up to 1.5M||0%||Q2 2022||Trammell Crow Company|
| TGS Cedar Port DC 1
||East-Southeast Far||1,208,019||0%||Q2 2022||TGS Group|
| Empire West Business Park - B9
|| Northwest Outliers
|| Q2 2022
||Stream Realty Partners LP
|NorthPoint 90 Logistics Center - B3||Northeast I-10||687,902||100%||Q3 2022||NorthPoint Development|
|Empire West Business Park - B4||Northwest Outliers||666,360||0%||Q2 2022||Stream Realty Partners LP|
|Prologis Presidents Park - B2||North Hardy Toll Road||629,186||100%||Q2 2022||Prologis, Inc.|
| The Uplands Twinwood Business Park
||Sugar Land||546,000||0%||Q4 2022||Clay Development & Construction|
| TGS Cedar Port DC 2
||East-Southeast Far||496,421||0%||Q3 2022||TGS Group|
|HoustonTradeport Ph II, B1||Southeast Outer Loop||457,400||100%||Q3 2022||NorthPoint Development|