By Zack Taylor, senior vice president, Colliers
Houston’s industrial market continued to see strong leasing activity in the third quarter. Overall net absorption for 2021 should easily pass 20 million square feet, making it the best year on record by a long shot. For context, Houston’s industrial market has, on average, absorbed between 8 million and 11 million square feet of space per year since 2014.
Houston’s North and Southwest submarkets absorbed the most space in the third quarter of this year, led by Lowe’s Home Improvement taking down 1.5 million square feet and Amazon taking 1.9 million square feet in each of those respective submarkets. Total marketwide leasing volume for the year is well over 30 million square feet and does not show any signs of stopping as we hit the midpoint of the fourth quarter.
Zack Taylor, Colliers
Direct vacancy is continuing its downward trend, but rental rates have largely remained the same on new product. Second-generation infill warehouses are experiencing the greatest increase in rents, especially for tenants with requirements between 20,000 and 50,000 square feet.
Many of these tenants are faced with a dilemma: They can either accept higher rents for their infill locations or relocate to more expensive buildings in less desirable locations outside the city.
In general, tenants are also not receiving the same level of concessions that characterized market activity in the first and second quarters. We expect this trend of gradually reduced concession packages to continue for the next few quarters.
Houston’s current construction pipeline spans about 12 million square feet, but new development should start to trend upward as several sizable new projects are announced. Several of these planned developments are in the West and South submarkets, which have seen significant increases in both supply and demand over the past three quarters.
The recent boom in Houston’s South submarket can be attributed to the amount of raw land still available. While the submarket has historically never received seen much attention from developers, its proximity to Houston’s container ports and access to the city are no longer being overlooked.
The lack of available land south of the Houston Ship Channel has forced tenants to consider spaces that are further west. In the absence of available spaces in this area, Houston’s South Beltway submarket has proven to be the next best option.
Houston’s West submarket has long been viewed as an owner-occupier market. Companies like Rooms to Go, Costco and Academy Sports + Outdoors all occupy significant amounts of space, but almost all of it is corporately owned.
Empire West the first significant speculative development in the submarket in several years. Phase I of the development delivered three buildings totaling over 1 million square feet, all of which were leased earlier this year. Phase II will include six buildings totaling over 2.3 million square feet. The success at Empire West has opened the floodgates for developers trying to accommodate big box users.
The current development climate in Houston is not for the faint of heart. Land prices have risen 25 to 35 percent over the past 12 months. Prices for certain key construction materials have gone up as much as 20 to 30 percent over the past three months. Throw in local and global supply chain backlogs, and you have a recipe for disaster.
Fortunately for the Houston market, the institutional appetite for industrial assets appears to be never-ending, and as long as the institutional money is flowing, developers will continue to build as fast as they can.
The Port of Houston continues to benefit from the supply chain issues at Southern California ports. The port’s container volume has increased significantly in 2021 and should set a record of over 3.2 million 20-foot equivalent units (TEUs). The cost to ship containers from Asia to the East and Gulf Coast areas is now cheaper then sending them to the West Coast.
Houston’s unemployment rate is down to 6 percent, slightly higher than Texas’ overall unemployment rate of 5.6 percent. Houston has recovered nearly 225,000 of the 365,000 jobs that have been lost since the beginning of the pandemic. The seasonal job market over the holiday season is anticipated to be the highest it has ever been, and the rise in global energy prices should also usher in a strong spate of hiring in 2022.
Like the rest of the country, Houston is experiencing an industrial wave unlike any other we have seen. E-commerce and population growth continue to be key drivers of warehouse demand, and neither look like they are stopping any time soon. The only question is how long will this wave last.
— This article originally appeared in the November 2021 issue of Texas Real Estate Business magazine.