Investing in Houston's Future: Industrial Market Insights

Navigating the Moderating Leasing Landscape and Record New Supply in Houston’s Industrial Market

1. Houston’s industrial leasing activity has slowed, showing a 20% decrease compared to 2022, yet remains robust against pre-pandemic levels.
2. The city anticipates a record high of new industrial space, with a significant portion still available for lease.
3. Rising vacancy rates, expected to reach 7.5%, reflect the interplay of slowing demand and increasing supply.
4. Despite these trends, Houston’s diverse industrial demand drivers continue to position it as a top U.S. market.

Houston’s Industrial Market: Strong Absorption Despite Slowing Trend

Houston’s industrial market remains robust reported by CoStar, with 23.2 million SF of positive net absorption in the last year. However, this rate has slowed compared to the three-year average of 27.3 million SF. Supply has been outpacing demand for two consecutive quarters. Consequently, the vacancy rate has increased from a five-year low of 5.1% to 6.2% and may exceed 7%.

Stable Vacancy Rates in Smaller Industrial Properties Amid Larger Scale Focus

Despite the overall market trend, smaller industrial properties (25,000 SF or less) have maintained a consistent vacancy rate of around 4.6% over the past decade. These smaller properties continue to exhibit vacancy rates in the 4% range. This stability is likely to persist as developers primarily focus on constructing much larger properties. The demand for these smaller spaces remains significant, keeping their vacancy rates relatively low.

Surge in Large-Scale Industrial Leases Despite Recent Economic Cautiousness

Between 2021 and 2022, Houston’s industrial vacancy rate significantly decreased due to a record number of large leases (100,000 SF or larger). In 2022 alone, tenants signed 100 such leases, more than doubling the annual average between 2010 and 2020. The first half of 2023 saw 33 leases of this size, still well above the average for previous years. However, larger space users have become more cautious recently due to economic uncertainties, impacting the leasing activity.

East Southeast Far Submarket Leading in Net Absorption Amidst Construction Boom

The East Southeast Far Submarket, with the most extensive industrial inventory, consistently leads in net absorption. This submarket is a key area due to its proximity to essential infrastructure like the Port of Houston. Despite a substantial construction pipeline, the availability of large spaces remains tight, often requiring build-to-suit solutions. For instance, both MSI and FedEx recently moved into large, custom-built facilities in this submarket, reflecting the ongoing demand for sizable industrial spaces.

Record Year for Industrial Construction in Houston and Other Sun Belt Markets

Houston, alongside Sun Belt markets like D-FW and Orlando, gears up for a record year in industrial construction. Under-construction projects constitute 3.4% of Houston’s inventory. This expansion outpaces the national average, with a notable pullback in new starts due to higher interest rates. The market will likely see a significant decrease in the delivery of new projects.

High Availability in New Industrial Projects Across Houston

About 70% of Houston’s industrial space under construction is available for lease. Significant projects include several over 1 million SF, mainly unleased. The East-Southeast Far Submarket leads in construction, featuring large-scale speculative projects. Recent deliveries in this area demonstrate the continued demand for massive industrial spaces.

Northwest Outliers Submarket: A Hub of Industrial Growth and Major Leases

The Northwest Outliers submarket, central to West Houston’s growth, is seeing significant industrial development. Notable projects include PinPoint Commercial’s large speculative warehouse and Stream Realty’s substantial investments. Tesla’s lease of a one-million-square-foot warehouse highlights the area’s growing industrial appeal.

Houston’s Industrial Expansion: A Decade of Significant Growth

Houston’s industrial market has seen a dramatic 30% expansion in the past decade. This growth, driven by strong job and population trends, places Houston among the top three U.S. markets for new industrial supply. Only DFW and Inland Empire have seen more industrial space added in this period.

Marginal Employment Contraction Expected in Houston Amid Recession Risks

Oxford Economics forecasts a slight contraction in Houston’s employment growth, marginally better than the U.S. average. Despite recession risks, this downturn is less severe compared to the national projection.

Houston’s Record Job Growth and Rapid Recovery from Pandemic Losses

Houston has impressively rebounded from pandemic-related job losses, surpassing pre-pandemic employment levels. 2022 marked a historic high in job creation, outperforming previous years and setting the stage for sustained growth.

Houston’s Diversified Economy Poised for Future Growth

Houston, known for its oil industry, is diversifying with significant developments in life sciences and biotechnology. The Texas Medical Center’s TMC3 project is a major contributor, poised to create thousands of jobs and economic benefits.

Houston’s Advantages: Low Cost of Living and Strategic Location for Medical Tourism

Houston’s affordable living and strategic location offer unique advantages. Its connection to Latin America and its status as a medical tourism hub adds to its appeal, enhancing its economic resilience and diversity.

Closing Thoughts

In summary, robust growth, significant job recovery, and increasing economic resilience define Houston’s industrial market. The city’s commitment to diversifying its economy, particularly in the fields of life sciences and biotechnology, presents a landscape ripe with investment opportunities. Amidst these promising developments, for those looking to navigate and capitalize on Houston’s dynamic market, contacting Lumicre for your investment needs is a prudent step. Our expertise and insights can guide you through the complexities of the market, ensuring informed and strategic investment decisions.