Activity in the Houston Industrial Market Slows
Key Takeaways:
- Construction volume declines
- Deliveries and absorption are up
- Leasing activity slows
- Rental rates increasing
Houston Highlights
Activity in the Houston industrial market level slowed during the third quarter, with new supply at 9.7 million square feet, outpacing net absorption of 6.7 million square feet. Almost twice as much new product has been delivered than absorbed year-to-date. Developers have reduced the construction level to 22.3 million square feet after achieving record-level totals in previous quarters. The overall vacancy rate increased by 30 basis points to 6.5% in the third quarter from 6.2% in the second quarter, while rents reported a slight increase to $9.35 per square foot from $9.23 last quarter. Leasing activity totaled 7.8 million square feet, down from 8.3 million square feet the previous quarter and 12.2 million square feet year-over-year. Rents marginally increased to $9.35 per square foot from $9.23 psf last quarter and 7.7% year-over-year.
Houston’s industrial overall vacancy rate climbed 30 basis points during the third quarter. Net absorption totaled 6.7 million square feet while more than 9.7 million square feet of new supply was delivered.
Although construction levels have slowed during the year, the area has already surpassed the previous year’s new delivery total. Overall market conditions will determine which of the more than 250 proposed buildings break ground.
Market Fundamentals
Executive Summary
Construction deliveries in the first three quarters of 2023 are almost 27 million square feet. With a quarter left to go, Houston has surpassed the 24 million square feet delivered last year. With another 5 million square feet or more expected to be delivered by year-end, 2023 will set a new annual delivery record of more than 32 million square feet of new space.
This year’s construction deliveries are a stark contrast to the limited square feet planned to be delivered in 2024. To put this in perspective, Houston has delivered more square footage in each of the last three quarters than what 2024 is expected to deliver all year.
Despite the significant number of new deliveries, the vacancy rate is still below 7.5%. Leasing velocity appears to be holding firm despite fears of a looming recession. This quarter’s activity was led by several large lease transactions, including Distribution Alternatives’ lease of 850,000 square feet, Cargill’s lease of 507,225 square feet, and Daikin’s 500,000-square-foot lease.
Year-to-date absorption is hovering around 15 million square feet in the Houston industrial market, which should put us in line to finish the year around 20 million square feet. Although this year’s absorption numbers may seem low when compared to the last two years, they are still well above the absorption numbers posted pre-COVID-19. The absorption numbers seen across the country over the last two years are not sustainable, and we are seeing a return to normalcy.
Rental rates have stabilized in the larger bulk-distribution buildings, but rates continue to climb in smaller infill spaces. We are keeping an eye on a few soft pockets that have received more of the recent building deliveries, but none are to the point of distress.
Overall, our outlook for the remainder of the year remains cautiously optimistic. We expect leasing velocity to remain strong for the next two quarters. The capital markets will remain soft, with very few large transactions ($50 million+) expected to close through the end of the year.
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