Houston’s industrial market delivered 30.4M SF in 2020, more than any other U.S. market
Commentary by Walker Barnett | Principal & Director
The industrial real estate market continued to be Houston’s most robust commercial real estate market sector in the fourth quarter. With tailwinds from the Q3 post-shutdown recovery, Houston’s fourth quarter saw stronger absorption, increased leasing activity and greater call volume from brokers running transactions and end-users re-engaging in their search for space.
As we evaluate the 4th quarter absorption numbers and look at 2020 overall absorption, we must take a more granular look at the absorption type. With 24MM SF of institutional-grade buildings either delivered or under construction, Houston has been one of the nation’s most active construction markets. The construction volume and building sizes show that Houston continues to grow as a core market for owners and occupants of industrial real estate. However, when evaluating the twenty largest individual occupancy absorption data points which range from 2,165,000 on the large side to 200,000 SF on the small side, 60% of those move-ins comprising 9.8MM SF were in owner-occupied or specialty built-to-suit facilities. Put another way; those transactions did not take speculative industrial buildings off the market.
We have a substantial amount of inventory to work through, but several transactions late in the 4th quarter will substantially impact absorption in early 2021. Most significant among these new leases is Dunavant Distribution Group, represented by John Nicholson of Colliers, who took down 784,000 SF at Bay Area Business Park near the Port of Houston. The Port submarket has had very active leasing with many buildings owned by Colliers’ clients like Prologis, National Property Holdings and Crow Holdings Industrial, seeing outstanding absorption in 2020, with promise for even more absorption in 2021.
The north submarket has also recorded some progress with leasing. Cypress Preserve Logistics Center, represented by Ryan Byrd and Walker Barnett of Colliers, saw its first lease of 157,000 SF in late December, with occupancy expected in the first quarter. Third-Party Logistics companies remain among the most active prospects for vacancies based on our current marketing reports.
The net positives of our active construction cycle, improving absorption and end-users selecting to own instead of lease facilities, have had a meaningful impact on land sale values. Industrial land that traded for $2.00 to $4.00 per square foot previously, can now command pricing anywhere from $4.50 to $7.50 per square foot. The increasing scarcity of urban development-ready land, coupled with much more demanding stormwater retention requirements from the City of Houston and Harris County, is pushing larger transactions to Chambers County, Waller County and Montgomery County. However, developers and end-users are adjusting to seller driven expectations on settlement prices for shovel ready land.
Indeed, the 3rd and 4th quarters of 2020 showed that a path forward exists for Houston industrial real estate. The e-commerce effect from Amazon, related fulfillment companies and other thirdparty logistics companies continues to bear itself out in completed and active negotiations around the Houston market. We recognize that we must achieve herd immunity through a more broadly available vaccine, but as we expect to see companies traveling to Houston with greater frequency in the near term, we expect the second half of 2021 to be a very active cycle for industrial real estate. The tenant-balanced market we now have can rapidly switch to a landlord favored market as Houston benefits from a national post-COVID economic awakening.
The industrial sector largely serving oil field services firms and manufacturers of oil field utilized goods (buildings between 20,000 and 80,000 square feet with yard storage) was hit hard in 2020. The decline in oil demand and prices resulted in US rig counts dropping to approximately 20% of the average rig counts over the past 10 years. With demand returning and supply constrained, oil prices have returned to the low $50’s. We expect this sector to fully stabilize in Q1 and to begin a reasonably strong recovery by year-end 2021.
Vacancy & Availability
Houston’s average industrial vacancy rate increased 30 basis points from 8.5% in Q3 2020 to 8.8% in Q4 2020 and by 220 basis points annually from 6.6% in Q4 2019. The increase in vacancy is due to the addition of 237 new buildings added to inventory since the beginning of 2020. Only 48% of the 30.5M SF of new inventory has been leased since being delivered.
At the end of the fourth quarter, Houston had 54.3M SF of vacant industrial space for direct lease and an additional 1.3M SF of vacant sublease space. Among the major industrial corridors, the Inner Loop Corridor, Liberty County and the South Corridor have the lowest vacancy rates of 5.1%, 0.8% and 5.4%, respectively. The submarket with the largest percentage of vacant space is the North Corridor, which has a 10.5% vacancy rate.
Absorption & Demand
Houston’s industrial market posted 6.2M SF of positive net absorption in the Q4 2020, an annual increase of 47.6%. The elevated absorption can be attributed to large tenants moving into build-to-suit or owned facilities. Only a small percentage occurred in existing mutli-tenant properties.
Some of the tenants that contributed to absorption by relocating or expanding in Q4 2020 include Ross Dress for Less moving into a 2,165,000 SF owned facility in the Sugar Land submarket. Medline Industries moved into a 900,000 SF build-to-suit facility located in the Northwest Outlier submarket. Five Below moved into an 860,000 SF owned facility in the Woodlands/Conroe submarket.
Much of the Q4 2020 positive net absorption occurred in the Southwest Corridor, recording 2.9M SF, and the Northwest Corridor, recording 1.9M SF. All of the major industrial corridors recorded positive net absorption in Q4, with the exception of the Northeast and Liberty County Corridors.
According to our data service provider (CoStar Property), Houston’s industrial leasing activity increased over the quarter from 6.1M SF in Q3 2020 to 7.5M SF in Q4 2020. The majority of fourth quarter transactions consisted of leases for 50,000 SF or less; however, there were several larger deals that occurred. The table below highlights some of the larger transactions that closed in Q4 2020.
8.2M SF of industrial space is under construction in Houston, with 35.5% of this space pre-leased. The largest project under construction in Q4 2020 is a 1M-SF spec distribution warehouse, located in TGS Cedar Port Industrial Park in Baytown, TX. The majority of projects under construction are located in the Southwest, North, Northwest and Southeast Corridor submarkets. Below is a partial list of the largest buildings currently under construction.