HOUSTON INDUSTRIAL | Q3 2018 Quarterly Market Report · Q3 2013 Q3 2014 Q3 2015 Q3 2016 Q3 2017 Q3 2018 Millions (SF) Flex Manufacturing Warehouse/Distribution Southwest 11% Southeast

HOUSTON INDUSTRIAL | Q3 2018

Quarterly Market ReportOCTOBER 2018

HOUSTON | AUSTIN | SAN ANTONIO

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Supply & DemandEXECUTIVE SUMMARYVacancy increases slightly as development booms

Houston’s overall industrial vacancy rate grew to 5.7% in Q3 2018, an increase of 40 basis points quarter-over-quarter, and 50 basis points year-over-year. Net absorption was positive 1.8 million sq. ft. for the quarter, rising 152.3% over last quarter at 733,000 sq. ft. New construction delivered during the third quarter stood at 4.5 million sq. ft.—a level not seen since a record-breaking 6.4 million sq. ft. in Q3 2016. There is currently 9.9 million sq. ft. under construction, with an additional 700,000 sq. ft. due to break ground in October. Triple net average monthly asking rents increased to $0.59 per sq. ft. quarter-over-quarter from $0.58, and up from $0.56 year-over-year.

Houston’s economy continues to grow at a healthy pace

Houston employment grew 3.8% over the three months ending in August, led by a surge in construction (13,600 jobs). Also seeing gains were wholesale durable goods and transportation (4,233 jobs). The unemployment rate in the metro fell slightly to 4.2% in August, the lowest seasonally adjusted rate for Houston since February 2008. In comparison, Texas—and the U.S.—both had unemployment rates of 3.9%. The price of West Texas Intermediate crude oil in September averaged $70 per barrel, although there hasn’t been any growth in the U.S. rig count over the past few months. In addition, commercial and industrial lending was again the growth driver in Houston, rising 22.4% from the same quarter a year ago after climbing 30.5% in Q1 2018.

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Market Indicators

Current Q3 2018

Prior Quarter Q2 2018

Year Ago Q3 2017

Vacant Direct 5.5% 5.0% 5.0%

Vacant Total 5.7% 5.3% 5.2%

Available Direct 8.3% 7.9% 7.8%

Available Total 8.8% 8.5% 8.5%

Net Absorption (SF) 1,849,583 733,097 4,166,190

Leasing Activity (SF) 5,018,102 6,018,855 6,175,775

Construction (SF) 9,872,381 12,092,651 6,865,557

Deliveries (SF) 4,514,188 1,847,459 3,056,079

Avg Asking Rent (NNN/MO) $0.59 $0.58 $0.56

Inventory (SF) 569,131,448 564,592,873 559,176,495

On the heels of a slower second quarter, many industrial professionals anticipated that deals would roll into the second half

of the year. The prognosticators were right, as the market recorded positive net absorption of 1.8 million sq. ft. in the third quarter. Major move-ins during the third quarter included Vinmar International occupying 500,000 sq. ft. in southeast Houston; Kuraray American taking occupancy of 369,755 sq. ft. at Bayport Logistics Park in Pasadena; and 231,838 sq. ft. of space at 22533 NW Lake Drive becoming occupied in northwest Houston. Duke Realty also leased the remainder of Gateway Northwest, while Clay Development landed two tenants in their Cutten Road Distribution Center with Doorscapes taking 88,000 sq. ft. and Western Post USA 122,000 sq. ft.

On the sales front, Houston continues to see strong activity with investors looking for investment grade industrial product. Black Creek Group acquired the 293,000-sq.-ft. Cutten Road Distribution Center from Clay Development, Exeter closed on a 20 building 1.25 million-sq.-ft. portfolio and Bahrain-based Investcorp paid $300 million for 56 properties throughout the country, including two in Houston. Speculative Development has also continued with Triten Real Estate Partners announcing two new spec projects in Southeast Houston and Hines kicking off Boulevard Oaks in Southwest Houston. And one of the largest user transactions of the year recently took place with the acquisition of the 673,785-sq.-ft. cross dock building on Cane Island Parkway by Southern Glazer’s Wine and Spirits. All the new development is supported by the overwhelming demand for Class A industrial space from tenants in Houston and throughout the country.

Houston executives quietly celebrated as the price of WTI crude held an average of over $70/barrel for the month of September even though rig counts remained unchanged from previous reports. While the leasing activity for small freestanding manufacturing buildings is still not at 2014 levels, the market continues to see larger manufacturing requirements hit the market at a steady clip. With Port Houston reporting an 8% increase over last year for overall tonnage (currently sitting in the top 5 for containers in the country) and the steady increase of WTI crude, we anticipate that manufacturing contracts are soon to follow. The unknown variable affecting the health of the manufacturing sector continues to be tariffs implemented by the current administration.

Ultimately, deal velocity is expected to continue to increase in the fourth quarter, and several speculative projects that will deliver in 2019 should also be announced. All said, Houston’s industrial market is motoring forward with little slowdown in sight.

Broker’s Perspective

Quarterly Market Report

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“While the leasing activity

for small freestanding

manufacturing buildings

is still not at 2014 levels,

the market continues to

see larger manufacturing

requirements hit the

market at a steady clip.”

John FerruzzoPartnerTeam Leader - Industrial GroupNAI Partners

Nick PetersonSenior Vice PresidentNAI Partners

Ryan SearleVice PresidentNAI Partners

MARKET OVERVIEWNet absorption bounces back

Vacancy increased slightly, while net absorption increased 152.3% to 1.8 million sq. ft. compared to this time last quarter at 733,000 sq. ft. The higher net absorption can be attributed in part to the 9.2 million sq. ft. that has been delivered to the market in 2018 with only 25.0% of that space available for lease. Positive influences on overall net absorption include major move-ins during the third quarter, involving Vinmar International moving into their 500,000 sq. ft. in southeast Houston; Kuraray American taking occupancy of 369,755 sq. ft. at Bayport Logistics Park in Pasadena; and 231,838 sq. ft. of space at 22533 NW Lake Drive becoming occupied in northwest Houston. Across the Houston metro, Warehouse/Distribution space equaled 752,520 sq. ft. of positive net absorption, Flex space was responsible for negative 285,691 sq. ft., while positive 76,967 sq. ft. of Manufacturing space was reported.

Houston industrial market expanding

Since the beginning of the oil downturn in Q3 2014, over 50 million sq. ft. has been delivered, expanding the Houston industrial market by 9.3%. Of the 10 million sq. ft. still in the pipeline, 64.5% is available for lease. An example, Plastic Bagging & Packaging leased a new distribution center at Cedar Port Industrial Park in the Southeast submarket of Houston. The 519,224-sq.-ft., rail-served facility is under construction with completion scheduled for the summer of 2019. The new building, an expansion, will be located at 5055 E. Grand Parkway South in Baytown, just west of Plastic Bagging & Packaging’s existing facility. The new campus will help meet the wave of export growth as Gulf Coast chemical companies continue to ramp up resin production. Port Houston and other major Gulf Coast ports handle more than 80% of the nation’s polyethylene exports, according to data from S&P Global Platts, driving demand for industrial distribution and logistics space.

Port Houston jumps to top 5 U.S. container ports

Port Houston is No.1 in the U.S. in foreign tonnage and is now in the Top 5 for containers alongside Los Angeles, New York, Savannah and Long Beach, according to JOC Piers data covering the second quarter of 2018. Port Houston is outpacing trade for the U.S. as a whole in 2018, led by strong imports. During the first six months of 2018, Port Houston imports from the Trans-Pacific region increased by 24%, a significant jump compared to overall U.S. Trans-Pacific imports, which increased by 5%. In addition, Port Houston reported

Net Absorption

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Flex Manufacturing Warehouse/Distribution

Southwest11%

Southeast23%

South1%

Northwest33%

Northeast3%

North 29%

Under Construction

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Vacancy by Property Type

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finishing the month of August with overall tonnage for the year at close to 28 million tons, reflecting an 8% increase over last year. Steel tonnage remained steady reporting 29% growth for the same time period. Container volume remained solid, although this time last year port operations were closed for a week in August due to the effect of Hurricane Harvey. However, year-to-date activity continues to be strong with a port-wide increase of 11% overall in TEU (twenty-foot equivalent unit), with loaded container units up 10% compared to last year.

Investment sales activity

Real Capital Analytics data reports the rolling 12-month industrial sales volume as of September 2018 in the Houston area at $1.7 billion, resulting in a 39.3% increase. The buyer composition in 2018 is made up of 42% private, 28% REIT/listed, 14% institutional, and 13% user/other. Costar reported in September that Hines sold a 447,605-sq.-ft. manufacturing facility within Greens Port Industrial Park, a 650-acre development located at 13770 Industrial Road in Houston, to a private investor for an undisclosed price. The rail-served facility in the Port of Houston submarket is fully leased to AFGlobal, a tech and manufacturing company.

Leasing activity

The volume of square footage signed during the third quarter remained stable at 5.0 million sq. ft. compared to last quarter at 6.0 million sq. ft., and 6.2 million sq. ft. at this time last year. Direct leases of existing properties represented the lion’s share of the transactions. Top lease transactions that were signed in 2018 included: the 411,442-sq.-ft. lease signed by Goodman Manufacturing at 6751 N. Eldridge Parkway in the Northwest submarket; the 289,000-sq.-ft. deal inked by Forward Air Solutions at 18727 Kenswick Dr. in the North submarket; and the 257,835-sq.-ft. lease signed by Unis, LLC at 10535 Red Bluff Rd in the Southeast submarket.

Average asking NNN rent increases

Monthly rental rates for the entire market on average have reached $0.59 per sq. ft., as of the third quarter of 2018, up from $0.58 from the previous quarter, with a greater increase seen from $0.56 per sq. ft. at the same time in the previous year. The monthly average rate for Flex space is currently at $0.78 per sq. ft.; Manufacturing rates are at $0.54; and Warehouse/Distribution space sits at $0.57. The North submarket currently has the highest monthly overall average rate at $0.64 per sq. ft., followed by the Northwest submarket at $0.61.

Houston Industrial Cumulative Monthly Sales Volume Year-to-date volume ($): 1,716,998,420, Year-over-year chg: 39.3%Source: Real Capital Analytics

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Average NNN Asking Rent


MARKET OVERVIEWSubmarket Stats


Submarket Statistics Inventory (SF)

Total Vacancy

(%)

Total Availability

(%)

Q3 2018 Total Net

Absorption (SF)

YTD Total Net

Absorption (SF)

Q3 2018 Deliveries

(SF)

YTD Deliveries

(SF)

Under Construction

(SF)

Total Avg Asking Rent

($/SF/MO/NNN)

Houston Market Total 569,131,448 5.7 8.8 1,849,583 5,430,849 4,514,188 9,231,070 9,872,381 0.59

Flex 48,224,219 9.7 12.2 50,478 -97,381 58,200 126,066 237,935 0.78

Manufacturing 87,269,683 3.2 5.7 36,784 399,496 0 825,960 335,000 0.54

Warehouse/Distribution 433,637,546 5.8 9.1 1,762,321 5,128,734 4,455,988 8,279,044 9,299,446 0.57

CBD Total 54,949,320 4.6 8.4 -482,120 -424,007 0 0 0 0.53

Flex 3,280,716 6.4 8.4 -1,765 12,345 0 0 0 1.14

Manufacturing 10,082,990 2.1 9.4 -4,464 22,304 0 0 0 0.77

Warehouse/Distribution 41,585,614 5.1 8.2 -475,891 -458,656 0 0 0 0.46

North Total 99,678,170 6.9 10.9 468,327 1,850,299 187,725 1,330,295 2,891,563 0.64

Flex 10,642,702 13.3 17.8 4,478 35,279 58,200 126,066 237,935 0.78

Manufacturing 13,049,657 4.4 6.2 23,247 -92,826 0 40,500 0 0.50

Warehouse/Distribution 75,985,811 6.5 10.7 440,602 1,907,846 129,525 1,163,729 2,653,628 0.63

Northeast Total 35,766,373 3.0 6.2 -304,960 -36,824 0 184,650 320,000 0.41

Flex 571,309 14.7 16.7 -10,995 -27,826 0 0 0 0.70

Manufacturing 6,875,253 0.6 2.3 33,000 56,900 0 0 0 0.35

Warehouse/Distribution 28,319,811 3.4 7.0 -326,965 -65,898 0 184,650 320,000 0.41

Northwest Total 162,888,373 6.6 9.4 357,196 1,138,867 1,587,750 3,270,264 3,234,541 0.61

Flex 16,566,966 10.1 12.8 25,174 -229,063 0 0 0 0.67

Manufacturing 23,686,735 4.2 5.9 54,239 -119,819 0 72,720 320,000 0.56

Warehouse/Distribution 122,634,672 6.7 9.7 277,783 1,487,749 1,587,750 3,197,544 2,914,541 0.60

Southeast Total 97,220,086 5.8 8.9 1,423,048 2,564,139 2,687,875 4,203,167 2,310,887 0.59

Flex 2,526,807 8.6 11.5 14,105 -32,091 0 0 0 0.96

Manufacturing 17,058,283 2.0 3.7 5,700 697,217 0 712,740 15,000 0.65

Warehouse/Distribution 77,634,996 6.6 9.9 1,403,243 1,899,013 2,687,875 3,490,427 2,295,887 0.56

South Total 47,873,414 3.6 6.6 118,296 -38,089 10,000 101,020 65,765 0.49

Flex 2,143,129 10.0 11.5 33,603 151,078 0 0 0 0.56

Manufacturing 9,268,125 1.2 3.0 16,217 -20,625 0 0 0 0.43

Warehouse/Distribution 36,462,160 3.9 7.3 68,476 -168,542 10,000 101,020 65,765 0.50

Southwest Total 70,755,712 5.5 0.3 269,796 376,464 40,838 141,674 1,049,625 0.63

Flex 12,492,590 7.1 7.6 -14,122 -7,103 0 0 0 0.98

Manufacturing 7,248,640 7.0 10.5 -91,155 -143,655 0 0 0 0.55

Warehouse/Distribution 51,014,482 4.9 6.8 375,073 527,222 40,838 141,674 1,049,625 0.60

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Information and data within this report were obtained from sources deemed to be reliable. No warranty or representation is made to guarantee its accuracy.

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MARKET OVERVIEWHouston Industrial Submarkets

1. CBD

2. North

3. Northeast

4. Northwest

5. Southeast

6. South

7. Southwest


Quarterly Market ReportOCTOBER 2018

NAI Partners Houston Office 1900 West Loop South, Suite 500 Houston, TX 77027

tel 713 629 0500

www.naipartners.com


Leta WausonDirector of Research

[email protected] 713 275 9618


Documents

HOUSTON INDUSTRIAL | Q3 2018 Quarterly Market Report · Q3 2013 Q3 2014 Q3 2015 Q3 2016 Q3 2017 Q3 2018 Millions (SF) Flex Manufacturing Warehouse/Distribution Southwest 11% Southeast