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Q3 2022 | Houston Industrial Market Report

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2022_Q2_Industrial_HERO_1536x1040

 

“The Greater Houston MSA industrial market is in excellent shape. Southeast Texas ports continue to break records for incoming (and exporting) goods as distribution shifts more to the Gulf and Southeast U.S. ports from the highly constrained West Coast ports. We expect this trend to continue after the severe backlogs and potential upcoming labor issues on the West Coast.”
Patrick Duffy | President of Colliers in Houston

   

Key Takeaways

  • Leasing activity remains steady
  • Positive net absorption
  • Vacancy up slightly as 9M SF delivers 
  • Rental rates continue to increase
  • Construction starts up

2022_Q3_Industrial_Vacancy Rate

  2022_Q3_Industrial_Net Absorption 
     
 2022_Q3_Industrial_Under Construction    2022_Q3_Industrial_Lease Rate

 

Houston Highlights

Houston’s industrial market continued to gain momentum as leasing velocity reached over 11 million square feet in the third quarter. The increase in demand for space continued to spur new development with over 27 million square feet under construction and an additional 64 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 third quarter, pushing the year-to-date total to more than 21 million square feet. The vacancy rate increased 40 basis points quarterly, but was down annually by 150 basis points.

Market Highlights

2022_Q3_Industrial_Market Highlights 

Historic Comparison

2022_Q3_Industrial_Historic Comparison 

 

Market Fundamentals

2022_Q3_Industrial_Market Fundamentals 

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

Recent Transactions

2022_Q3_Industrial_Recent Transaction 2
 2022_Q3_Industrial_Recent Transaction 1

 

Executive Summary

Commentary by Patrick Duffy
The industrial market continues to outperform the balance of the commercial real estate market both nationally and here in Southeast Texas. Industrial absorption has slowed slightly from the very robust pace seen in all of 2021 and the first half of 2022, but remains steady, with just under 21 million SF absorbed year-to-date in the Greater Houston MSA.

The demand for industrial facilities, from manufacturing and assembly to distribution, especially east of the Rocky Mountains, is expected to remain strong despite a global economic slowdown and a push by central bankers to cool the world’s major economies. As inflation continues to burn hot and consumer spending shifts more to essential items such as food, transportation and shelter, the demand for other goods has cooled. The impact of this reality was most clearly demonstrated by Amazon significantly reducing their projected growth and placing over 60 of their facilities into the sublease or sale market globally. Amazon had been on a historic growth path prior to this significant shift in strategy. Interestingly, while Amazon has clearly slowed its growth in the Southeast Texas market, they have moved forward with occupying the new newly acquired facilities here.

The debt markets have moved to a much more cautious position in the past 90 days, increasing borrowing costs, reducing loan-to-value ratios and generally being much tighter with new issuances. Simultaneously, the investor/ buyer market has adjusted expectations and raised Capitalization / Yield requirements to help cover the higher debt constants and achieve higher positive yields relative to inflation. As a result, the 10-year Treasury yield has increased significantly with only a partial adjustment on Capitalization/ Yield expectations. While CAP rates have increased, the spread between current CAP rates and the 10-year treasury compressed in the first part of this year to an average of 3.7% down from 4.15% in 2021.

Construction costs have leveled off in the past 90 days, with most construction materials slowing their price increases and, in many cases, costs have come down. However, labor cost and borrowing costs (as previously mentioned) have continued to increase while exit CAP rates have risen (reducing the price per $ of rent). This combination has made speculative development much riskier, and as a result, we expect a significant slowdown in new development in the near term. In addition, many industrial users (like Amazon) have moved to a more defensive posture as the calls for a “hard landing” recession get louder. As a result, we expect most build-to-suit projects to move forward, but even this portion of the development pipeline will slow.

The Greater Houston MSA industrial market is in excellent shape. Southeast Texas ports continue to break records for incoming (and exporting) goods as distribution shifts more to the Gulf and Southeast U.S. ports from the highly constrained West Coast ports. We expect this trend to continue after the severe backlogs and potential upcoming labor issues on the West Coast.

Other than those already under construction, most speculative activity has been put on hold or canceled by the major developers, especially the national institutional players. As a result, we expect build-to-suit activity to remain solid, but speculative deliveries to drop dramatically by the end of 2023.

With a slowdown in new development, we expect rents to increase by 3-5% in the next twelve months and for competition for lease space to remain strong, albeit down from the pace we saw in the past 18 months.

Industrial Cap to Interest Spread

2022_Q3_Cap Rate Spread

Under Construction

Institutional Inventory - 500,000 SF or Greater

2022_Q3_Industrial_Under Construction Graph

Construction Activity

Houston Industrial Construction
2022_Q3_Industrial_Construction Industrial  
2022_Q3_Industrial_Construction by Sub


2022_Q3_Industrial_SearchResultImage_1024x972

Q3 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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