At the end of the first quarter 2017, the Houston industrial market finds itself in very familiar territory, with several dominant trends largely maintaining course.
Despite continued struggles within the oilfield manufacturing sector, the overall market is still in very good shape. Large consumer goods distributors driven by population growth in the greater Houston area and plastics users responding to increased demand from expanded chemical plant capacities produce the headliner transactions in the current market. This has been the case for the last 12 to 24 months.
While leasing and sales for existing manufacturing facilities have slowed in recent years, there are some bright spots to report. CoStar notes an overall market vacancy increase of less than 0.5 percent to a still-historically low 5.7 percent. Northwest and Southeast Houston lead the way in terms of major activity.
Greg Barra, Boyd Commercial
Northwest Houston currently has 5.1 percent vacancy, driven by consumer product companies like Serta Mattresses, which leased 268,482 square feet at Trammell Crow’s Fallbrook Pines, and Shaw Carpet, which leased 201,600 square feet at Prologis Jersey Village. These firms are inking long-term deals for manufacturing and distribution hubs, reflecting their confidence in the area’s long-term consumer growth.
Multiple large positions from FedEx and UPS in Northwest Houston serve the ever-increasing demand for deliveries related to online purchases. One cannot mention online shopping without including Amazon, whose new facilities include a 1 million-square-foot fulfillment center in Katy and an 855,000-square-foot fulfillment center under construction. The latter is one of the few bright spots in the North Houston submarket, which boasts a pro forma-crushing vacancy rate of nearly 9 percent.
CoStar reports that warehouse asking rates in the Northwest submarket are about $6.85 per square foot. However, an informal survey of major landlords and comparable information from more than a dozen transactions of 75,000-plus-square-foot since 2016 suggests actual triple net lease rates are more like $4.75 to $5 per square foot. These figures take into account tenants’ credit and the extent of the specific improvements funded by landlords.
Outside of the largest transactions, landlords are reporting strong activity and increased rental rates for deals in smaller spaces across the Northwest submarket. Although there exists a glut of space around 50,000 square feet, quality availabilities under that number are difficult to find in a multi-tenant park setting.
Small business and corporate users with smaller footprints are rapidly leasing both new and “venerable” product, with several large institutional landlords reporting rental rate increases for renewals, as well as fast re-leasing of small dock-high spaces in this size range. Depending on product age and finish, these rates can range from $4 to $7.25 per square foot on a triple net basis.
On the Southeast side, large transactions for plastic pellets, resins and various third-party logistics users are bolstering market activity. A good example is Avera’s 465,851-square-foot lease to Kuraray America Inc. at Bayport Logistics Park in Pasadena, which will prompt construction of two new building.
This class of users is attracted to the Southeast submarket’s access to rail, proximity to all parts of Port Houston and the expansive petrochemical manufacturing complex stretching from Baytown to Freeport. Not to be outdone by the Northwest, the Southeast has also seen some large consumer product-driven deals, such as IKEA’s 996,482-square-foot distribution center across two Clay Development buildings in Cedar Port Distribution Park.
The manufacturing sector has weathered a rough stretch since the downturn of oil prices in the summer of 2014. Activity among the largest oilfield users indicates that disposition is the order of the day. NOV, Baker Hughes, Weatherford and others have completed sales and subleases for large facilities over 50,000 square feet across the entire market, with some inventory still available.
Smaller users — those occupying less than 50,000 square feet — of manufacturing buildings that need overhead cranes, outside yards and heavy power have historically performed well in our market. But these companies have been reluctant to make long-term lease commitments in the current climate. However, area developers that specialize in this type of building have begun leasing them to tenants that don’t necessarily need the heavy manufacturing capacity at generally lower rental rates in addition to signing shorter-term leases with the more conventional manufacturing companies.
Sales volume of manufacturing and distribution facilities under 50,000 square feet remains strong. This can be attributed to easily available and relatively inexpensive debt for owner-occupied loans, as well as the preference of many small business owners in Houston to invest in their own real estate.
Reasonably priced sale listings have a relatively short listing timeline as a result. This trend bodes well for the long-term health of Houston’s small industrial user community, which is and has always been the largest occupier of space across the market
— By Greg Barra, CCIM, SIOR, Boyd Commercial. This article first appeared in the July 2017 issue of Texas Real Estate Business magazine.