HOUSTON INDUSTRIAL | Q2 2020 Quarterly Market Report...Q2 2010 Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2...

HOUSTON INDUSTRIAL | Q2 2020

Quarterly Market ReportJULY 2020

HOUSTON | AUSTIN | SAN ANTONIO

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Completions Net Absorption Vacancy

Supply & DemandEXECUTIVE SUMMARYVacancy rate continues to increase

Houston’s average industrial vacancy rate increased 40 basis points quarter-over-quarter to 8.1%, which also represented an increase of 190 basis points year-over-year. At the end of the second quarter, Houston had 47.6 million sq. ft. of vacant industrial space for direct lease and an additional 2.0 million sq. ft. of vacant sublease space. Quarterly net absorption was at 2.3 million sq. ft., down 32.9% compared to Q1 2020, and down 16.5% from Q2 2019. The record-breaking levels of new construction have contributed to the increase in the vacancy rate, as there has been 8.8 million sq. ft. of available space delivered to the market so far in 2020—about 60% of the total 14.8 million sq. ft. completed. The vacancy rate for Class A properties is at 16.6%, up from 10.4% this time last year. The overall monthly average asking triple-net rent is up at $0.64 per sq. ft., compared to this time last year at $0.61, due primarily to the new product delivered to the market.

Houston economic indicators

According to the Greater Houston Partnership, Houston’s economy continues to struggle and likely will for the foreseeable future as it continues to grapple with the effects of the COVID-19 pandemic and the collapse of the oil market. Altogether the Houston region lost 350,200 jobs in March and April and gained back 73,800 jobs in May. Global oil demand remains weak and may have to look as far as 2022 to see demand for crude reach pre-pandemic levels. U.S. crude production has dropped by 2 million barrels a day while the domestic rig count sits at 266, the lowest it’s been since the 1930s. On a positive note, Saudi Arabia and Russia reached a truce on output to OPEC agreeing to hold 9.7 million barrels per day off the global market.

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Market Indicators

Current Q2 2020

Prior Quarter Q1 2019

Year Ago Q2 2019

Vacant Direct 8.1% 7.7% 6.2%

Vacant Total 7.7% 7.4% 6.0%

Available Direct 12.4% 11.2% 9.3%

Available Total 11.5% 10.5% 8.7%

Net Absorption (SF) 2,324,135 3,461,540 2,783,077

Leasing Activity (SF) 3,784,443 6,190,223 7,799,336

Construction (SF) 16,333,845 18,855,978 14,121,645

Deliveries (SF) 4,746,309 9,947,831 5,019,877

Avg Asking Rent (NNN/MO) $0.64 $0.62 $0.61

Inventory (SF) 608,874,145 598,720,955 585,796,020

The effects of the ongoing COVID-19 pandemic continue to negatively impact a majority of businesses in the Bayou City.

The Houston industrial real estate market is no exception. As a result of COVID-19, oil prices hit an all-time low during the 2nd quarter; unemployment and bankruptcies have increased drastically; and lenders have implemented more stringent processes in order to provide real estate loans. Coupling those issues with the oversupply of new industrial product, along with the uncertainty that arises every presidential election year has created significant headwinds for the Houston industrial real estate market in the short term.

New construction continues to move forward (4.7 million sq. ft. delivered and 16.3 million sq. ft. under construction) and average asking sale prices continue to hold steady—though the number of properties sold to users has slightly decreased by roughly 8% since Q1 2020. Additionally, net absorption is down 32.9% compared to last quarter, and the vacancy rate has increased to 8.1%.

However, not all these numbers should be viewed as negative—especially if you are an industrial tenant with an upcoming lease expiration. Yes, the average “asking” rate has increased, with the triple net average monthly rents at $0.64 per sq. ft. But while landlords will continue to ask for higher rental rates, the actual transacting rental rates are decreasing at a rapid pace. Landlords are having to get aggressive on rates and concessions in order to stay competitive.

We have seen quite a few transactions occur at 8% to 12% lower than the asking rate. We have also experienced renewals at rates lower than tenants had been previously paying. It is difficult for certain industries to plan for much more than a few months at a time right now, but locking in these low rates long-term will only help to cut costs for the long run.

Nobody knows how long this pandemic and current economy will last. What we do know is that the people of Houston are resilient and are able to adapt in tough situations. We are hopeful that this crisis will right itself by the 4th quarter 2020 – 1st quarter 2021 and we can get back to business as usual. In the meantime, we will closely monitor the market statistics and create specific plans that will allow our clients to limit liability and position themselves for long-term success.

Jake WilkinsonVice PresidentNAI Partners

Broker’s Perspective

Quarterly Market Report

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“It is difficult for certain

industries to plan for

much more than a few

months at a time

right now, but locking in

these low rates long-term

will only help to cut costs

for the long run. ”

MARKET OVERVIEWCOVID-19 impact and long-term effects of oil price war

Houston’s industrial market was no doubt the metro’s best-performing property sector recently and seemed relatively unaffected by the recent oil downturn in 2014/2015. As the population in Houston and surrounding areas flourished, so did the demand to distribute goods. The previous relatively steady price of oil combined with the population growth made the Houston area a very desirable market for industrial developers, resulting in record levels of completed construction. However, Houston’s industrial market faces headwinds amid the ongoing pandemic and oil price war.

Supply outpacing demand

Supply has outpaced demand since Q1 2018 in the Houston industrial market. The amount of industrial space delivered to the market so far in 2020 is close to 15 million sq. ft., more than two-and-one-half times the amount of net absorption at 5.8 million sq. ft. For existing buildings, net absorption is the measure of total square feet occupied less the total space vacated over a given period.

Construction

Houston has experienced record-breaking amounts of industrial product under construction with the current amount at 16.3 million sq. ft. Even prior to the coronavirus pandemic and the oil price war, there were discussions around whether Houston’s industrial market risked becoming overbuilt. The coronavirus pandemic may lead to project delays or a slowdown in groundbreakings over the next few months, as owners, lenders, and developers come to terms with the changing economic environment both locally and nationally. During the pandemic, Empire West Business Park broke ground on a 300-acre industrial development located 30 miles west of Houston, in Brookshire. Three speculative buildings, totaling 1 million sq. ft., are under construction, in addition to the business park’s infrastructure and roads. The development is just west of the Amazon fulfillment center and northwest of the Rooms-to-Go distribution facility. The expected completion date is spring of 2021.

Port Houston managing through pandemic

The Journal of Commerce reported that the coronavirus (COVID-19) and the United States-China trade war are having negative effects on U.S. containerized imports and exports. Many ports are registering year-to-date declines in both categories

Net Absorption

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Flex Manufacturing Warehouse/ Distribution

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Pre-Leased Space Available Space

Construction

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Vacancy

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Flex Manufacturing Warehouse/Distribution


in early 2020, meanwhile expecting a cautious rebound from importers in the second half. Most recent, the Gulf ports increased their market share by 1.9% points to 10.8% of U.S. containerized imports and exports. Port Houston, which has benefited the past year from a surge in resins exports, outperformed other top 10 ports with a 14.1% increase in outbound container volume. In the past few years, resins manufacturers have invested billions of dollars to expand production of resins and other plastics in the U.S. Gulf Coast region. Natural gas is still plentiful and inexpensive, with billions of dollars of investment in these facilities to continue producing plastic, according to Port Houston. U.S. resin exports through the busiest Gulf Coast gateway jumped 30% year-over-year in the first quarter, according to PIERS.

Investment sales trends

Real Capital Analytics data reports quarterly industrial sales volume for Q2 2020 in the Greater Houston area at $140 million, down compared to second quarter 2019 at $410 million. The primary capital composition for buyers in the second quarter was made up of 72.0% REIT/listed, and 13.8% private. For sellers, the majority was 37.4% private, 22.6% institutional, and 20.9% REIT/listed investors. In May, Hallmark Floors purchased a 170,476-sq.-ft. distribution center at 730 Genoa Red Bluff Road near Port Houston. During this year’s economic shift, an opportunity to be closer to consumers and manufacturing locations made strategic sense. The seller, Vigavi SECD, LLC, developed the facility, which delivered in January 2020.

Average asking NNN rent increases

Monthly rental rates for the entire market on average increased to $0.64 per sq. ft., as of the second quarter of 2020, up quarter-over-quarter and year-over-year. The monthly average rate for Flex space is currently at $0.91 per sq. ft.; Manufacturing rates are at $0.58; and Warehouse/Distribution space sits at $0.60. The Southwest ($0.78 PSF) and North ($0.71 PSF) submarkets currently have the highest monthly overall average rate, followed by the Northwest ($0.63). With the rising costs to developers that are bringing new projects with high quality space to the market, rental rates could remain elevated.

Deliveries Year-to-Date

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Millions (SF)

Pre-Leased Space Available Space

Cumulative Monthly Sales Volume Houston IndustrialSource: Real Capital Analytics

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MARKET OVERVIEWSubmarket Stats


Submarket Statistics Inventory (SF)

Total Vacancy

(%)

Total Availability

(%)

Q2 2020 Total Net

Absorption (SF)

YTD Total Net

Absorption (SF)

Q2 2020 Deliveries

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YTD Deliveries

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Under Construction

(SF)

Total Avg Asking Rent

($/SF/MO/NNN)

Houston Market Total 614,028,057 8.1 12.4 2,324,135 5,785,675 4,746,309 14,694,140 16,333,845 0.64

Flex 48,285,533 10.1 13.9 3,205 -33,950 67,379 97,379 162,595 0.91

Manufacturing 88,813,640 3.9 5.8 -79,678 682,947 150,550 1,431,676 188,790 0.58

Warehouse/Distribution 476,928,884 8.6 13.4 2,400,608 5,136,678 4,528,380 13,165,085 15,982,460 0.60

CBD Total 52,635,428 5.3 9.4 -32,002 -543,067 0 0 0 0.51

Flex 3,000,321 4.2 6.7 23,956 16,289 0 0 0 1.76

Manufacturing 8,307,089 3.9 6.5 0 -168,962 0 0 0 1.10

Warehouse/Distribution 41,328,018 5.7 10.2 -55,958 -390,394 0 0 0 0.46

North Total 114,412,272 10.0 15.7 1,210,526 2,237,512 1,516,573 4,543,139 1,870,280 0.71

Flex 10,971,429 14.1 21.8 37,575 -128,783 40,800 50,800 0 0.91

Manufacturing 13,957,174 2.8 5.1 171,590 1,206,505 55,550 1,296,476 106,396 0.68

Warehouse/Distribution 89,483,669 10.6 16.6 1,001,361 1,159,790 1,420,223 3,195,863 1,763,884 0.65

Northeast Total 38,661,337 5.9 7.6 -45,873 413,586 44,000 234,200 279,500 0.47

Flex 606,720 3.2 5.2 24,201 39,780 0 0 0 0.73

Manufacturing 7,186,410 1.6 3.0 -5,675 -21,675 0 40,200 0 0.80

Warehouse/Distribution 30,868,207 6.9 8.7 -64,399 395,481 44,000 194,000 279,500 0.44

Northwest Total 175,410,704 8.9 12.0 141,883 1,097,494 1,315,085 5,057,817 5,097,548 0.63

Flex 16,063,283 10.9 13.5 -57,835 -1,862 10,000 30,000 60,912 0.76

Manufacturing 25,144,635 5.3 5.9 158,218 58,637 95,000 95,000 0 0.53

Warehouse/Distribution 134,202,786 9.3 12.9 41,500 1,040,719 1,210,085 4,932,817 5,036,636 0.63

Southeast Total 108,479,450 8.4 13.5 606,511 1,434,401 1,633,227 3,089,004 3,130,685 0.58

Flex 2,752,840 5.8 7.4 27,241 44,596 0 0 0 0.89

Manufacturing 17,343,996 3.4 5.2 -372,500 -390,200 0 0 82,394 0.47

Warehouse/Distribution 88,382,614 9.5 15.3 951,770 1,780,005 1,633,227 3,089,004 3,048,291 0.58

South Total 47,764,842 5.3 9.0 413,883 474,062 0 155,000 289,358 0.53

Flex 2,289,960 9.8 9.7 -22,047 -47,975 0 0 0 0.85

Manufacturing 9,441,510 3.4 5.5 80,283 97,436 0 0 0 0.69

Warehouse/Distribution 36,033,372 5.5 9.8 355,647 424,601 0 155,000 289,358 0.48

Southwest Total 76,664,024 7.6 13.3 29,207 671,687 237,424 1,614,980 5,666,474 0.78

Flex 12,600,980 8.5 12.0 -29,886 44,005 16,579 16,579 101,683 1.02

Manufacturing 7,432,826 5.3 10.0 -111,594 -98,794 0 0 0 0.57

Warehouse/Distribution 56,630,218 7.8 14.0 170,687 726,476 220,845 1,598,401 5,564,791 0.71

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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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Fort Bend Tollway

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MARKET OVERVIEWHouston Industrial Submarkets

1. CBD

2. North

3. Northeast

4. Northwest

5. Southeast

6. South

7. Southwest


Quarterly Market ReportAPRIL 2020

NAI Partners Houston Office 1360 Post Oak Blvd., Suite 1900 Houston, TX 77056

tel 713 629 0500

www.naipartners.com


Leta WausonDirector of Research

[email protected] 713 275 9618



Quarterly Market ReportJANUARY 2020

NAI Partners Houston Office 1360 Post Oak Blvd., Suite 1900 Houston, TX 77056

tel 713 629 0500

www.naipartners.com

Leta WausonDirector of Research

[email protected] 713 275 9618

HOUSTON INDUSTRIAL | Q2 2020 Quarterly Market Report...Q2 2010 Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2...

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