Strong Year for Industrial Market Ends Quietly

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Jan. 5, 2017

industrial leasingWhile industrial leasing activity was consistently strong over the course of Houston’s economic downturn, the sector experienced a drop-off in transactions at the close of 2016.

The total volume of deals signed in the fourth quarter fell to 1.8 million square feet, below the industrial long-term average of 2.1 million square feet. The drop-off was exacerbated by the fact that Houston’s industrial sector saw 4.2 million square feet of absorption in the third quarter, the largest absorption total in recent history. While a seemingly concerning statistic, the decrease in leasing volume is the natural effect of sustained low vacancy and availability across the Houston industrial market. With total vacancy at 5.5 percent, the number of large blocks available for lease is limited. As a result, 62.4 percent of leases this quarter were sourced from deals smaller than 50,000 square feet.

Healthy market fundamentals are evidence of the discipline that industrial development has displayed throughout the oil price decline. Even so, the market has softened slightly, and construction is no exception. The pipeline dropped by 32 percent, to 4.7 million square feet, following 2.1 million square feet in deliveries. No new projects broke ground in the fourth quarter. In an interesting twist, the entirety of deliveries this quarter came from the southern half of the metro, with 82 percent from the Southeast submarket alone.

Across town, the Southwest emerged as a contender between the traditionally high performing Northeast and Southeast submarkets. The Southwest has added new supply and maintained consistent rent growth as companies have sought an alternative from its high-demand neighbors to the north and east. The submarket experienced an influx of activity from both flex and rear-load users and still offers opportunities in quality, bulk distribution product.

After remaining flat between the second and third quarters, industrial asking rents resumed their upward climb, rising to $6.64-per-square-foot NNN during the fourth quarter. This represents a growth of 4.3 percent quarter-over-quarter and 6.3 percent year-over-year. Rent growth should decelerate marketwide in 2017.

Industrial tenant activity remains fairly consistent and includes retail distribution/consumer goods, building materials, logistics and plastics. Barring another sizable dip in energy prices, 2017 is likely to see an uptick in demand over the next 12 to 18 months as prices stabilize and end-users gain confidence.

For more market data on Houston’s Industrial market, click the links below to download the full Q4 2016 industrial market report and statistics.

Q4 2016 Houston Industrial Insight

Q4 2016 Houston Industrial Statistics

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