Despite adding approximately 25 million square feet of new
industrial space in 2021, the market took it in stride and
managed to absorb a record 28.5 million feet and drive
the vacancy rate down to 7.1%. Demand for industrial
space shows no signs of letting up in 2022 and we expect
another strong year for this sector, both in
Houston and nationwide.
Patrick Duffy | President of Colliers in Houston
- Robust investment activity
- Historical positive net absorption recorded
- Leasing velocity gained momentum, reaches historical high
- Vacancy rate drops on a quarterly and annual basis
- Port Houston sets records
Houston’s Industrial market continued to gain momentum as leasing velocity reached 9.0 million square feet in the fourth quarter, pushing the year-end volume to a historical record of 44.5 million square feet. The increase in demand for space continued to spur new development with over 16.6 million square feet under construction and an additional 51.1 million square feet proposed or in the final planning stage. Houston’s industrial market recorded 9.6 million square feet of absorption in the fourth quarter, bringing the year-end total to a historical high of 28.5 million square feet of positive absorption. The vacancy rate decreased 140 basis points annually from 8.5% in Q4 2020 to 7.1% in Q4 2021.
The forecast in the above graph is based on a trailing 4-quarter historical average.
2021 was a banner year for Houston Industrial real estate. A number of factors contributed to record setting deliveries and absorption. Among those are historically low interest rates, increased port activity, e-commerce expansion, increased capital investment in U.S. CRE, and continued pent-up consumer demand due to COVID-19. Each element contributed to what was a perfect storm, which allowed the Houston market to absorb over 28,500,000 SF, where a typical year has recorded approximately 12MM to 15MM SF. This level of growth was achieved despite labor and material shortage obstacles.
Port Houston (PH)
Houston’s port has seen its busiest year ever. In November, the port surpassed its previous high-water mark of 3,001,164 TEUs by nearly 16%. Full year estimates are in excess of 3,400,000 TEUs. Material shortages, increased consumer demand, and labor shortages in other port markets are all contributing factors to the record PH growth. Developers continue to seek viable land positions in Houston’s east and southeast submarkets to service this ever expanding port activity.
The COVID-19 pandemic and low interest rates continue to fuel the massive e-commerce growth. Amazon and Wal-Mart have continued the rapid expansion of their distribution networks in the Houston MSA and across the U.S., with other competitors following suit to claim their piece of the pie. Same-day delivery and direct to consumer fulfillment needs are fueling the rapid increase in distribution space occupied by retailers. 2021 retail sales are estimated at roughly $4.5 trillion. Within that total is e-commerce (non-store) sales, which have grown nearly 20% to a range of $1.09 - $1.13 trillion. Developers continue to deliver new product in an attempt to meet this demand.
Dry Powder has continued to flow into the U.S. real estate market. Cap rates for core product in the Houston area have now breached the high 3’s. Forwards have sold at a feverish pace with investors looking to capitalize on rent growth, low interest rates and record absorption. In certain circumstances, investors will pay more for a project with some vacancy, as their rent growth projections far exceed the current market rate. This narrative is well supported in other markets (Austin, L.A., Phoenix, Chicago, etc.), but Houston has not and will not see those vast annual increases. The rent growth recorded in Houston is noticeable, but albeit subdued (5-8%), and is largely due to increased material costs, not under supply. Houston is unique in that it has few geographic constraints and even fewer political constraints when entitling new developments. Developers can have a building constructed in as little as 14 months following the land purchase. Less than double digit rent growth and impending Fed rate hikes will not, however, prevent the continued investment. Rate hikes will temper cap rate compression, but CRE investment remains an effective hedge against inflation. Looking ahead, 2022 will be another strong year.
Institutional Inventory - 250,000 SF or Greater
|Business Park/Address||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
|| Northeast Outliers
|| Q2 2022
||Stream Realty Partners LP
|Cedar Port Logistics Center - B1||East-Southeast Far||799,680||100%||Q1 2022||Capital Development Partners|
|NorthPoint 90 Logistics Center - B3||Northeast I-10||687,902||100%||Q3 2022||NorthPoint Development|
|Empire West Business Park - B4||Southwest Far||666,360||0%||Q2 2022||Stream Realty Partners LP|
|Prologis Presidents Park - B2
||North Hardy Toll Road||629,186||100%||Q2 2022||Prologis, Inc.|
|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|