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Q2 2022 | Houston Industrial Market Report

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2022_Q2_Industrial_HERO_1536x1040

 

“Capital flows are still robust for industrial assets despite some near-term headwinds as the sector continues to show strength on the user (leasing) demand side and reasonable new construction pipelines.   We believe that the central part of the country, including SE Texas, are well positioned for robust future industrial growth as the Gulf of Mexico Ports and North/South rail options push more distribution from the backlogged West Coast to this region.”
Patrick Duffy | President of Colliers in Houston

   

Key Takeaways

  • Robust leasing activity
  • Positive net absorption
  • Vacancy drops 
  • Rental rates increase
  • Construction starts up

2022_Q2_Industrial_Vacancy Rate

  2022_Q2_Industrial_Net Absorption 
     
 2022_Q2_Industrial_Under Construction    2022_Q2_Industrial_Lease Rates

 

Houston Highlights

Houston’s industrial market continued to gain momentum as leasing velocity reached over 10 million square feet in the second quarter. The increase in demand for space continued to spur new development with over 21 million square feet under construction and an additional 65 million square feet proposed or in the final planning stage. Houston’s industrial market recorded 6.6 million square feet of positive net absorption in the second quarter. The vacancy rate decreased 280 basis points annually from 8.5% in Q2 2021 to 5.7% in Q2 2022.

Market Highlights

2022_Q2_Industrial_Market Indicators 

Historic Comparison

2022_Q2_Industrial_Histroic Comparison 

 

Market Fundamentals

2022_Q2_Industrial_Market Fundamentals 

The forecast in the above graph is based on a trailing 4-quarter historical average.

 

Executive Summary

Commentary by Jim Pratt 
The headlines for the 2nd Quarter of 2022 might mimic a political campaign of yesteryear, “It’s the economy, stupid!” While that may be somewhat harsh, we are certainly in a period of dramatic change and uncertainty in the Houston industrial market. With inflation at 40-year highs, currently exceeding 9%, and YTD increases of 1.5% in the interest rates by the Fed, developers and investors alike are revising their investment parameters to reflect these significant shifts. While the appetite for investment doesn’t seem to be affected, there is a wider gap in Seller expectations and Buyer pricing that will likely grow through the end of the year. Further, additional increases in interest rates are expected to total 1.5% to 1.75% and should have a significant impact on valuations. As we are easing into a recession that could be exacerbated by the additional interest rate increases anticipated from the Fed, the impact of a national recession on the Houston economy, and more specifically the Houston industrial market, is unknown. We continue to have strong tailwinds that could likely carry us through without a huge impact.
International investment dollars are still pouring in as these investors are willing to accept lower returns in exchange for the safety of their investments. U.S. real estate is an excellent hedge against inflation and offers security. These investors may be muting the overall impact of rising interest rates on cap rates. While not rising point for point with interest rates, there is certainly movement in cap rates on most industrial real estate. Long-term debt has increased as much as 150 basis points, creating negative leverage where cap rates are lower than the interest rates on debt. To maintain the required debt coverage ratios, investors have to provide more equity with lower percentages of leverage to satisfy the lenders. All of these factors are affecting the pricing and will continue to have a more significant impact through the end of the year.
Nationally, according to the Wall Street Journal, property sales dropped 16% compared to April 2021. Prior to April of this year, sales had increased for thirteen consecutive months. The decline has been more pronounced in the Houston Industrial market. According to statistics from Real Capital Analytics, industrial sales dropped from 114 properties and $1,904,940,472 in the 4th quarter of 2021 to 57 properties and $1,549,963,942 in the 1st quarter of this year, and only 43 properties totaling $777,668,957 this quarter.  
Aside from the drop-off in industrial sales, we have a very healthy industrial market. The vacancy rate dropped from 6.11% in the 1st quarter to 5.6% this quarter. Year-to-date absorption through the end of the 2nd quarter was 13,078,101 square feet, in line with the record setting absorption in 2021. More importantly, the average rental rate increased from $7.88 to $8.60 over the past quarter. Where annual increases in rental rates had recorded 2% for many years, they increased substantially and are now typically ranging within 3.5% to 4%. Owners are bolstering their returns as they try to offset the impact of inflation with larger increases in the rental rates.
Another trend continuing to take root in the market is the preference for shorter-term leases by landlords. Houston has historically seen 5-6% annual increases in rental rates, but the weighted rental rate change over the 1st quarter was 5.52%. Landlords are reluctant to commit to long-term leases that lock in fixed rental rate increases, preferring shorter-term leases that allow for more significant rental rate increases at the end of the lease term. While lenders still want longer-term commitments for a stabilized cash flow on new acquisition loans and ground-up development, current owners typically renew for shorter terms.
So, despite all of the changes in the economy, we believe the Houston industrial market is strong and adapting to the changing parameters. We will continue to watch the economy closely, and adjust to changes in the market, but with a solid foundation, the outlook for the balance of 2022 continues to be good.

Under Construction

Institutional Inventory - 450,000 SF or Greater
  Business Park/Address
  Submarket  RBA  % Leased/Owned  Est. Delivery Date Developer/Owner   
   TGS Cedar Port DC 4
   East-Southeast Far  1,218,956  0%  Q4 2022 TGS Group  
   TGS Cedar Port DC 1
   East-Southeast Far 1,211,620  0%  Q3 2022 TGS Group  
   Empire West Business Park - B9
   Northwest Outliers
1,039,060
 0%
 Q4 2022
Stream Realty Partners LP
 
   Grand Central West - B4    Northwest Outliers    843,360     0%    Q1 2023   PinPoint Commercial  
   North Point 90 Logistics Center - B3    Northeast I-10   687,902   100%   Q3 2022    NorthPoint Development  
   Empire West Business Park - B4   Northwest Outliers 666,360  0%  Q3 2022 Stream Realty Partners LP  
   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  
   Houston Tradeport Ph II, B1   Southeast Outer Loop 457,400 100%  Q3 2022 NorthPoint Development  

 

Construction Activity

Houston Industrial Construction
  2022_Q2_Industrial_Construction Activity

2022_Q2_Industrial_SearchResultImage_1024x972

Q2 2022 | Houston Industrial Market Report

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Related Experts

Lisa Bridges

Director of Market Research

Houston

Lisa joined Colliers in 2010 as Director of Market Research and has 37 years of commercial real estate experience. Lisa initiates proactive market research projects to further the business goals of the company. She writes and prepares 29 market reports annually, including quarterly reports on Houston's retail, office, industrial and healthcare properties.  Further, she prepares statistical ownership reports for various clients as well as an annual Houston Economic Overview. Lisa also creates PowerPoint market presentations, trade journal articles, and other marketing materials supporting the company's business endeavors. She works with senior management in planning the company's marketing strategy and public relations support for local and national conferences, luncheon meetings, recruitment programs, and special events.  Lisa works closely with the company's brokers to develop effective custom market research material specific to existing and potential clients.

Lisa serves on the Colliers Editorial Board, the Colliers U.S. Research Council, and is a recipient of the Colliers Researcher of the Year Award.

Lisa earned the Commercial Property Research Certification (CPRC) from Colliers University.  CPRC is the first and only accreditation for commercial real estate research professionals. It offers a professional development path to increase strategic and tactical expertise in marketing/research, knowledge of the industry and capabilities with commercial real estate tools.

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Patrick Duffy

President

Houston

Pat is the managing director of brokerage services in Houston for Colliers.  Pat has more than 37 years of experience in commercial real estate as a producing broker, educator, sales manager and managing broker. Pat relocated to Houston from Florida where he served as President of the Colliers offices in Tampa Bay, Orlando and Southwest Florida.

​Pat started his career as Director of Marketing for a real estate data base company where he spent three years interviewing top brokerage houses throughout the United States and assisted in their automation needs as a consultant and instructor.   As President of the Colliers Houston office, he has direct responsibility for recruiting, training and managing the sales and leasing teams, property management and business plan creation and coordination for the company.

Pat was responsible for building and organizing retail service delivery capabilities for Colliers worldwide as chairman of the Colliers Retail Specialty Group (96-2000, 2002-2013).  Pat is also a founding member of the Colliers Oil and Gas practice group.  Among his academic accomplishments, Pat wrote the capstone case study for the CCIM program's final course offering from 1986 - 1998.  The case study combined the marketing and financial concepts taught by CCIM to allow the students to apply the material to a simulated commercial property disposition.

He has been an instructor for NACORE’s (now CORENET) Intermediate Finance Course and was awarded the Top-Rated Faculty Certificate in 2000.  Pat has been quoted in national and regional publications including the Wall Street Journal, Dow Jones, Newsweek, Real Estate Forum, National Real Estate Investor, Globe Street and others.  He has been an expert panelist for NAIOP, Real Share, ICSC and many other real estate organizations.

Pat has served as a member (and Chairman) of the Colliers Managers Steering committee, the Board of Directors for Colliers USA and is the past Chairman of the Colliers USA Board of Advisors.  In 2003, Pat was awarded Colliers Manager of the Year.  In 2004, he was chosen by Colliers as the Tom Richardson Award recipient, an honor based on strength of character. In 2012, Pat was chosen as the recipient of the Colliers USA Pinnacle Award for service excellence.  Pat is the only person in Colliers to win all three of these awards.  He served as an instructor for Colliers University 2010-14.   In 2017 Pat was recognized as a “Best Boss” by Real Estate Forum magazine.

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Jim Pratt

Principal

Houston

Jim Pratt has more than 35 years’ experience in commercial real estate.  Prior to joining Colliers in 2009, he was a Principal with NAI Houston. In addition to representing tenants, buyers and sellers of real estate, Jim has represented many institutional and private owners in the leasing of office and industrial properties and has developed an in-depth understanding of the dynamics involved and what makes a deal work for both tenants and landlords.  He is known for his significant creativity in the structuring of unique solutions for complex assignments, resulting in “win-win” transactions.  His analytical skills and his ability to communicate the pertinent facts throughout the negotiation process have produced significant results.

Jim has represented tenants and owners ranging from local entrepreneurs to large corporations in transactions in Houston and throughout North America, completing more than 100 assignments outside of Texas.  He has handled all types of industrial and land  requirements in addition to offices leases, and the acquisition and disposition of all types of real estate. In the last economic downturn, Jim helped structure sale/leasebacks providing significant liquidity for one of his clients.  Jim is currently assisting clients with the evaluation and implementation of this same strategy, as well as lease restructuring where applicable.

Prior to entering commercial real estate in 1985, Jim served as a project manager on several multi-million dollar commercial construction projects for W.S. Bellows Construction Corporation.  His educational background in architecture has also proven invaluable in assisting landlords and tenants in the evaluation process involved in site selection.

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