Houston’s Industrial Vacancy, Supply of Developable Sites Dwindle
Industrial space throughout the Houston continues to be absorbed at an astonishing clip, pushing vacancy levels to some of their lowest points this cycle.
According to Stream’s data, the overall industrial vacancy rate in Houston closed the third quarter at 4.9 percent. Vacancy rates in the six major Houston submarkets are all below 7 percent for the first time since Stream entered the Houston market in 2006.
The low vacancy rate across the market has triggered waves of new development. Stream estimates that across Houston, there is approximately 14 million square feet of institutional-quality space under construction, with another 25 million square feet already having delivered since 2014. To put that in perspective, Stream tracked the overall market at 260 million square feet in 2014 compared to 285 million square feet today – a 9% market growth over that four-year period. If you layer in the product under construction today, that takes that growth to over 13 percent.
Despite a hefty volume of development hitting the Houston market, leasing velocity continues to outpace new deliveries, keeping market fundamentals in check. This strength is attributable to many macro-economic factors but strong population growth, e-commerce, Hurricane Harvey recovery and the boom in the production of plastic resins are the most notable contributors to the industrial sector’s gains.
Average Lease Size Rises
Historically, Houston’s bulk distribution users have posted footprints of anywhere between 50,000 to 80,000 square feet. However, that range is expanding, if third-quarter data is any indication. This period in 2018 featured an above-average number of large-footprint leases that helped keep the citywide vacancy rate from rising.
According to Stream’s data, Houston saw five large industrial transactions totaling roughly 1.3 million square feet in the third quarter alone. These deals included Goodman, which leased over 640,000 square feet, collectively, at GLP’s Northwest Logistics Center and Carson Companies’ Union Crossing, Wayfair and RTIC, which leased 206,000 square feet, collectively, at Duke’s Gateway Northwest, and Valvoline which leased 470,000 square feet at Liberty’s Port Crossing.
On the supply side, the delivery of First Industrial’s First 290, Oakmont Industrial’s West Ten Business Park, Liberty’s Port Crossing Building 2, Clay’s Energy Commerce Center and the vacating of the former Randall’s distribution center added roughly 3.0 million square feet of available space to Houston’s industrial inventory during the third quarter. Most of this new supply has already been absorbed as is evidenced by Oakmont’s West 10 project trading to Glazers who will occupy the facility and the Valvoline lease at Liberty’s Port Crossing, and several leases being signed at Clay’s Energy Commerce.
Southeast Houston (Port Submarket) continues to lead the pack in terms of new product with more than 3 million square feet of projects currently under construction. Across town, the Southwest submarket has notched a record-low vacancy 3.8 percent, down 90 basis points since June. Again, the low vacancy has been the catalyst for new development — in the case of this submarket, more than 1.5 million square feet of speculative product is under construction with even more slated to deliver in 2019.
Leasing velocity remains strong in this pocket as evidenced by several recent leases by Amazon, Blue Line, Fairfield Geotechnologies, Carrier and others. These transactions have already started to balance the equilibrium of supply and demand in this submarket which has proven to be a strong option for tenants wanting to reach the population center of Houston near the intersection of Dairy Ashford and I-10 on Houston’s west side.
Other large-scale developments are in the works on the northern side of town, Dallas-based Crow Holdings Industrial is getting set to break ground on Layne Crossing, a 530,000 square-foot project. Another project between Atlanta-based Ridgeline Property Group and local developer Archway Properties will deliver Park Air 59, a 685,400-square-foot facility.
The sheer sizes of these new properties, many of which can be subdivided into smaller spaces or leased to individual users speaks to the trend of growing footprints in Houston’s industrial sector. Innovations such as higher clear heights, deeper truck courts to accommodate trailer storage and a higher density of employees per square foot are leading to an ever-evolving design which almost always require larger tracts of land to accommodate said amenities.
Where to Build?
Houston’s industrial market undoubtedly benefitted from the cleanup efforts tied to Hurricane Harvey in late 2017. But although providers of industrial materials saw higher prices and the sector experienced a short-term boost in occupancy during this time, the storm’s impacts are now becoming a bane to industrial real estate development.
It is increasingly difficult to find quality sites for development that are located outside Houston’s and Harris County’s 100-year and 500-year floodplains. The limited supply of core sites is driving up land prices and redefining the established boundaries for individual submarkets.
While most industrial users demand proximity to a network of highways and/or the Port of Houston, the reality is that meeting these requirements is becoming trickier. Core spaces with strong ingress/egress and immediate proximity to roads and waterways are being leased up quickly, and with rising land and construction costs, developing projects in these locations is becoming costlier.
— By Matteson Hamilton, managing director, and Justin Robinson, partner, Stream Realty Partners. This article first appeared in the November 2018 issue of Texas Real Estate Business magazine.