What area is your expertise?
Houston Industrial Leasing Market
What trends do you see presently in industrial development in your area?
Houston’s industrial market continued to record strong development activity at the start of 2008. The Port of Houston area, Northwest and North Houston (near IAH) account for the bulk of the new construction. Driving the robust activity in these submarkets is the strong growth and expansion at Houston’s Bush Intercontinental Airport (North Far) and the Port of Houston (Southeast).
What type of industrial product is doing well in your area?
Houston is becoming more of a distribution hub than ever before. We are seeing larger size transactions contributing to the overall absorption.
Who are the active industrial developers in your area?
First Industrial, ML Realty, Clay Development, Transwestern, ProLogis, and Duke Realty to name a few.
Please name one or two significant industrial developments in your area. What impact will these projects have on the market?
Interport Distribution Center – First Industrial Realty Trust – located in the Port area.
Park 288 – Transwestern – Central / Med Center.
Underwood Distribution Center – Clay Development – Port area.
Where is the majority of development taking place? Why is this area doing well?
The majority of the development is taking place in the Port of Houston area with approximately 6 million SF built, under construction, or planned.
What area do you expect to be the next big industrial development market? ?
West Houston / Katy, TX
Please describe the industrial leasing activity in your area.
Houston’s industrial leasing market registered a healthy quarter to kick-off 2008 by posting 755,268 square feet of positive net absorption, marking the 17th consecutive quarter the market has witnessed positive growth. The lion’s share of the quarterly growth occurred in Warehouse/distribution sector with 543,862 square feet of net absorption, which comes on the heels of posting a robust 6.1 million square feet of positive growth in 2007.
Please describe the industrial sales activity in your area.
Houston’s industrial investment sales market remains active but has slowed from previous quarters. According to Real Capital Analytics (RCA), private, public and institutional investors have spent $61.4 million throughout 4 sales transactions priced above the $5 million price tag during the first quarter of this year. Average sales prices stand at $41 per square foot, while average capitalization rates sit at 7.5 percent on all closed sales.
Please give a measure of industrial vacancy rates and a measure of available sublease space.
Overall vacancy inched upward by 50 basis points to 6.4 percent, as new construction deliveries outpaced demand. During the quarter, new space deliveries totaled nearly 1.2 million square feet, the majority being Warehouse/distribution type product with 847,300 square feet. In addition, Standard industrial properties saw vacancy increase by 110 basis points to 4.2 percent during the quarter, still the lowest vacancy among all property subtypes. Warehouse/distribution properties witnessed vacancy climb by 40 basis points to 6 percent during the survey period while R&D/flex properties saw vacancy actually edge downward slightly by 10 basis points to 14.3 percent.
What impact do current interest rates have on the industrial market? What predictions do you have for interest rates and their effect on the industrial market in the next year?
Although strong fundamentals in Houston’s commercial real estate market are expected to attract a larger share of national investors, the fact remains that the buyer pool has shrunk dramatically. On the macro level, historically low interest rates are expected to rise in 2008.
What industries do you expect to expand in the next year to absorb a great deal of industrial space? What areas will be affected?
Houston still stands to post another healthy year as local economic growth boosted by the thriving energy industry will continue to drive solid industrial growth. A strong local manufacturing sector supported by companies servicing the expanding energy and chemicals industries will contribute significantly to the annual absorption.
Would you like to make any additional observations about the industrial market in your area?
Rental rates should continue to rise in 2008 as demand for industrial space remains healthy. Tenants will have to contend with the higher price for the new product entering the pipeline, especially in submarkets where construction activity is most active as landlords and developers account for the skyrocketing land prices and construction costs. Currently, the rental rates for distribution on new construction properties are between $4 to $5 NNN per square foot.
Submitted by John Nicholson , senior vice president with the Houston office of Grubb & Ellis. Posted 06-19-08.
John Nicholson