Key Takeaways:
- Construction volume drops after record highs
- Deliveries up, increasing vacancy
- Leasing activity declines
- Rental rates increasing
Houston Highlights
The industrial market’s activity level slowed during the second quarter with new supply outpacing net absorption. At midyear, almost twice as much new product has been delivered than absorbed. Developers have decreased the construction level to 29.5 million square feet after record-level previous quarters. Positive net absorption this quarter was 3.9 million square feet, a 9.3% decrease from the previous quarter, while deliveries increased to 9.5 million square feet with less than half preleased. The 5.0 million square feet of new vacant product entering the market helped to lift the vacancy rate to 6.2%. Leasing activity totaled 7.5 million square feet, down from 10.5 million square feet the previous quarter.
Market Fundamentals
Executive Summary
The Houston industrial commercial real estate market continues to display steady activity and resiliency through the second quarter of 2023. The rise in vacancy from 5.7% during the first quarter to 6.2% in the second quarter is more a result of new construction delivery and less due to tenant move-outs. Of the 9.5 million square feet of new supply this quarter, approximately 47% was preleased upon delivery.
The construction pipeline currently totals 29.5 million square feet, a drop from the 34.8 million square feet in the first quarter. Construction starts have slowed due to constrained capital and continued upward pressure on interest rates.
Tenant demand also slowed during the second quarter, generating 7.5 million square feet of leasing activity. This activity combined with the stronger leasing activity of prior quarters led to another period of positive net absorption for Houston, with the mid-year total close to 8.7 million square feet. (Comparison: Dallas/Fort Worth reports approximately 9.2 million square feet of net absorption through midyear.)
The majority of absorption occurred with large deals in the high-demand, port-centric South and Southeast submarkets. Notable lease commencements include Quantix at AmeriPort for 1.2 million square feet (both landlord and tenant rep by Colliers Houston) and in the South with Penske occupying 603,780 square feet at IDV’s South Belt Central Business Park.
The continued strong activity of the South and Southeast submarkets has been buoyed by the Port of Houston’s continued growth. The Port is still operating well above historic averages with regards to container volume, although June 2023 volume is down 2% from the record-breaking 2022. This decrease could be signaling a return to more normal global supply chain shipping patterns. The outlook remains optimistic at Port Houston with Union Pacific announcing a new on-dock rail service to help streamline containers from ships directly to railcars. Such infrastructure investments will better position the Port as a competitive alternative to east and west coast ports.
Rent growth trend sustainable?
The recent rent growth trend remains robust in the Houston industrial real estate market, with increasing rates favoring landlords in both lease renewals and new lease transactions. The sustainability of this rent growth for the remainder of the year will be contingent on the status of the larger sublease spaces currently available (Broad Range, Safavieh, Article, Snow Joe, Wayfair), which may create some downward pressure on rents. The sublease availabilities coupled with a number of new and second-generation vacancies, primarily in the West and Northwest submarkets, may lead to a more tenant-friendly rate structure in those submarkets. Any deviation from this projection may stem from the slowing construction pipeline in the coming quarters and possibly into early 2024.
Overall the outlook for the remainder of the year is positive for Houston’s industrial real estate market. All these factors combined with Port Houston’s expansion, metro Houston’s continued regional population growth, and the region’s strong overall investment interest will carry momentum into and during the second half of 2023.
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