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Houston Industrial Market Stabilizing with Owner Occupied Growth

Houston’s industrial market is stabilizing, recording slightly negative absorption of 34,621 square feet citywide with limited major spec construction on the horizon, according to statistics released by Commercial Gateway. The negative absorption reported follows five quarters of positive absorption and a stabilization of rental rates during the last year. Vacancy overall is 8.5%, the same as last quarter, but almost a full percentage point lower when compared to 9.4% a year ago.

Properties classified as high-tech/R&D, the smallest segment of the market, are reporting the lowest vacancy rate of 3.3%. Manufacturing facilities are reporting the second lowest vacancy rate of 4.2%, with crane-ready buildings in short supply. Both high tech/R&D and flex-service centers, commonly referred to as office/warehouse, showed positive absorption for the quarter at 150,600 square feet and 106,543 square feet, respectively.

Rental rates have remained flat during the last year, with a quoted, weighted averaged annual rental rate of $5.37 per sq.ft. reported this quarter compared to $5.31 a year ago. Sublease space reported in fourth quarter represents a slight increase from last quarter but a substantial drop of 763,810 square feet from this same time a year ago.

Construction picked up dramatically in the first three months of the year, with 1.6 million square feet under construction. Of that total, 80.1 percent is planned as owner occupied, with only 300,000 square feet being built on a spec basis, which is a continuing sign of scarcity of certain product types within the market.

Commercial Gateway Member/Broker Comments on the Houston Industrial Market

Walker Barnett, SIOR, Principal, Colliers International
National economic data sources demonstrate that Houston remains one of the strongest industrial markets in the United States. First-quarter absorption and vacancy statistics indicate continued strengthening across all submarkets. Tenants that relocate to vacant spaces benefit from landlord concessions, but landlords are also holding closer to face rates on actual rental rates. In northwest Houston, warehouse users seeking more than 100,000 square feet with updated sprinkler systems to meet local code requirements have very limited options. A few large potential transactions considering the northwest Houston submarket have yet to land but could have a significant impact on market availability once they settle. By the end of the third quarter, effective rates should stabilize, and concessions will become less in the favor of tenants. Developers are scouring the market for land sites for speculative development with market conditions justify new construction.

“Due to the relatively low cost of capital available to business decision makers, institutional warehouse owners must still compete with buildings available for sale. However, seller’s expectations on exit valuations have them competing with design builders who can deliver buildings at a reasonable cost in 6- to 9-month time frames. As purchaser demand has increased, the number of buildings available for sale has decreased.

“Increasing oil prices and the resulting high fuel costs are weighing on regional user warehouse locations and logistics patterns, but are also driving demand in the oil services business. Crane-ready and crane-served buildings are rarely available to meet user-specific requirements. Local design developers are very busy proposing and actually constructing new design-build and build-to-suit projects in all submarkets around town. Several developers have speculative crane-served buildings under construction and slated for delivery this year. Due to input costs and demand, prices have returned to 2007 and 2008 levels, but long-term ownership strategies and cash held for investment by business owners are continuing to drive demand.

“Finally, international companies are focused on Southeast Texas as they seek manufacturing capacity growth inside the United States. ‘Made in America’ purchase requirements, a well-trained and non-union labor force, and the weak dollar are all contributing factors to encourage investment in new facilities in our region by multi-national companies.”

J. Michael Boyd, CRE, SIOR, Boyd Commercial
Although not reflected in the absorption numbers for the first quarter of 2011, industrial activity has been brisk with most of the focus on build-to-suit and design-construct projects for user companies. The energy sector of the economy has been the main driver for these projects. I anticipate that this activity will continue through the balance of the year with net absorption numbers to pick up accordingly.”

Mike Chance, Senior Investment Advisor, Coldwell Banker Commercial United, REALTORS
The Industrial market remains steady. Our group sees continued activity and requests for space, especially in the Port of Houston area. Since very few buildings are available in that area, buyers and tenants are expanding their search to include the South Belt area and further south on Interstate 45. There also seems to be an increase in the number of foreign firms looking to expand, and buildings with cranes as a requirement are also in short supply.

“The search for 4,000- to 12,000-square-foot industrial buildings continues to be dominated by companies associated with the oil industry. Buildings in good shape, in readily accessible areas, and with stabilized yard space are not lasting long on the market.”

Bill Ginder, SIOR, CCIM, Senior Vice President, Caldwell Companies
“Activity in the Houston industrial market has definitely picked up. Clients are making longer-term lease commitments or considering purchase options as the market heats up.

“I am also seeing ‘Fire Marshall’ absorption of newer industrial space as high-pile storage rules are being enforced. Companies in functionally obsolete buildings are being forced to reduce their inventory stacking to 12 feet and take temporary space in other buildings to store their overflow inventory.

“With no substantial amounts of new inventory entering the market, I think rents in newer properties will increase as occupancy levels reach record highs.”

 

Graham D. Horton, SIOR, CCIM, Vice President, Stream Realty Partners, L.P.
“Houston’s industrial market continues to record steady improvement. Vacancy levels have quietly fallen for eight straight quarters. Sublease inventory continues to dwindle as users seek flexible solutions for immediate space needs. Tenant concessions that were common over the last two years have started to diminish as rents have stabilized in most areas.

“In our discussions with users across various industries, it is evident that Houston remains a preferred destination for employers to locate and conduct business. With very limited development activity, strong core industries and nation-leading job growth projections, Houston is well positioned to take advantage of this recovering economy.”

Tom Lynch, Senior Vice President, Industrial Services, CB Richard Ellis
“Houston has the lowest industrial vacancy rate in the nation due to building stoppage. With the health of the market, we will probably see some speculation in the next two quarters.

“The industrial market currently has a shortage of developable land, especially close-in and in the Northwest market, which probably rates in one of the top five markets in the country. Investors would like to find land in the $1.75-$2.50 per-square-foot range; however, larger industrial tracts in the Beltway/290 area are priced at $4.50 per square foot and higher.

“Commercial values are rising across the board here since we did not have an over-supply of new construction, and the Houston job story is creating more investment money into our market. And regarding the city’s new drainage fees: they will affect rent growth as leases are recycled every three to five years.”

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