The same forces that contribute heavily to the strong performance of the local economy—a thriving energy sector and growth in trade volumes through the port—are lending support to the strong resurgence underway in the local industrial retail estate market. While Houston’s market is as broad-based as its economy, warehouse/distribution, rooted chiefly in the far southeastern suburbs (related to the port) and in the north and northwest (related in part to George Bush Intercontinental Airport), is by far the largest and most dynamic sector. Net absorption in this large market sector exploded in 2011 and has been strong as well, if somewhat less so, in 2012. Construction activity remains active but continues to trail demand as vacancy rates, low by national norms, continue to decrease; growth has returned to rents. Construction activity, accordingly, is increasing—in the warehouse/distribution market and in the Flex/R&D sector as well.
The rate of vacancy for the 203.1-million-square-foot warehouse/ distribution market tracked by Reis ended the second quarter at 10.1%, down 20 basis points from the quarter before, down 100 year-over-year, effects of the combination of strong demand and moderate construction activity. The total quarter-end vacancy volume was counted at 20.5 million square feet. An additional decline in the rate, to 9.8%, is projected for year-end as trends remain favorable. While also declining, the vacancy rate in the national warehouse/distribution market, for the sake of comparison, ended the second quarter at the notably higher rate of 12.7%.
The Flex/R&D market, last counted at 31.7 million square feet, also has seen recent occupancy improvement; its vacancy rate also runs below the national same-type rate. The second quarter closed at 12.1% locally, down 70 basis points from the quarter before, down 150 year-over-year. With demand expected to cool in the coming quarters, the small volume of Flex/R&D supply due on line during the second half of the year is expected to result in a moderate increase in the vacancy rate by year’s close. The second quarter national Flex/R&D vacancy rate, meanwhile, was 14.7%. According to Cushman & Wakefield, which tracks 352.1 million square feet of industrial space of all types metrowide, the second quarter overall vacancy was 7.6%, a decline of 170 basis points year-over-year.
SUPPLY AND DEMAND
A major effect of the economic downturn was the suppression of development. Development, however, did not cease; single-tenant build-to-suit projects, owner-occupied and otherwise, stepped to the fore. While overall volumes were down somewhat from what is typical for this market in periods of strength, they have been substantial nonetheless. Speculative development, meanwhile, is now making a cautious return. “Projects still require pre-leasing to start,” notes Cushman & Wakefield’s second quarter report on the local market, “but the momentum in traditionally active areas such as the Northwest, North, and Southeast markets has shifted to expansion in response to low vacancy rates and strong absorption.” According to Colliers International, the balance has again shifted in favor of speculative construction over build-to-suit.
The 4.0 million square feet of warehouse/distribution space net absorption alongside 1.2 million square feet of new supply deliveries reported by Reis for 2011 all told, was a shot across the bow of the downturn: the battle was joined; recovery was decisively underway. A setback during the first quarter of 2012 was followed by positive net absorption on the order of 648,000 square feet the quarter after. While net absorption trailed new supply year-to-date through mid-year—437,000 to 766,000 square feet—demand will overcome same-term new supply by year’s end. With both demand and supply volumes increasing thereafter, relative balance should take hold. Cushman & Wakefield attributes the market’s strong performance to a broad base of factors—”the energy industry, an overall improving economy, and strong trade activities through the port and the airports.”
Construction, as indicated, has picked up. Reis expects 2.1 million square feet of warehouse/distribution space to complete construction all told this year, 1.8 million of which in 18 mainly small projects had arrived on line per the date of this report. Including the remaining 319,000 square feet due on line by year-end, a total of 1.1 million square feet of warehouse/distribution space were underway per report date, mainly in relatively small projects (the 450,000-square-foot Ben E. Keith Distribution Center in southwest suburban Missouri City is an exception). With industrial’s typically short development timelines, however, a notably larger volume that what currently is under construction is expected to deliver all told in 2013: Reis’ second quarter 2012 analysis calls for a warehouse/distribution space completion total of 2.39 million square feet next year; net absorption will be a close match at 2.42 million square feet, according to the forecast.
The smaller Flex/R&D market has produced smaller absorption totals, as would be expected. Its performance, however, is nonetheless favorable. Net absorption for the first half of the year was counted at 358,000 square feet alongside 115,000 in new supply. A modest setback—net absorption at about negative 100,000 square feet—is expected over the remainder of the year amid small additional volume of new supply. Relative balance of supply and demand should install itself thereafter.
An unsteady performance through 2011 for warehouse/ distribution space rents has been followed by small gains in 2012 to date. At $4.51 psf and $4.18 psf, asking and effective averages for the second quarter were up 0.7% and 1.0% for the period and were up 0.9% and 1.0% year-to-date in the wake of respective growth rates of 0.0% and 1.0% all told for 2011. Moderate gains are expected for both rates over the remainder of the year. Unsteady growth was the pattern in 2011 in the Flex/R&D market as well; 2012 has shown improvement. At $6.74 psf and $5.99 psf, mean asking and effective rates for the second quarter in this sector were up 0.3% and 0.7% for the period and were up 0.7% and 1.2% since year-end. Last year’s rates were negative 1.2% and negative 0.2%.