HOUSTON INDUSTRIAL MARKET

Transcription

1 REAL ESTATE OUTLOOK HOUSTON INDUSTRIAL MARKET FIRST QUARTER 217 Industrial Sector Continues Push Forward Flex Market Softening under Pressure from Office Market Availability OV E R V I E W Industrial gains continue into The Houston industrial sector has remained resilient throughout the energy downturn, and continues to perform solidly through the first quarter of 217. However, challenges are beginning to arise, especially in the flex market as softness from the office sector spills into competition for tenants. Overall, direct vacancy rates remain relatively low, at up.3% over the quarter, but sublease space is becoming more of a situation to monitor with total vacancy at. Face rates are coming under pressure as well, driven by the increase in availability in the flex market. Concerns aside, the broad Houston economy continues to show improvement with rapid population growth, stabilizing oil prices and increasing rig counts leading many employers to begin hiring. As such, further deterioration in the sector should be minimal as long as the oil markets maintain stability. Net Absorption by Sector SECTOR 217 Flex (574,) SF 9, SF 2,447, SF 1,963, SF Vacancy by Sector SECTOR OVERALL NET ABSORPTION Absorption strong on east side of metro Flex 8.6% Net absorption for the first quarter totaled approximately 1.9 million SF, down slightly from fourth quarter absorption of 2.1 million SF. First quarter absorption for warehouse/distribution product led the way, recording 2.4 million SF, manufacturing recorded 9, SF, and flex space recorded negative 574, SF of absorption. The Southwest Near and South Near submarkets were the most impacted on the flex side with negative absorption of 232, SF and 191, SF, respectively. Notable Leases TENANT SF LEASE TYPE BUILDING Amazon 1,, Prelease Intersection of U.S. 9 and Woods Rd Northwest Far Gulf Winds 33,281 Renewal Greens Port Industrial Park Southeast Near Ford Motor Company 25, Renewal Alamo Crossing Commerce Bldg A McLane Company 9, New Interstate Commerce Center Bldg 2 North Far Iron Mountain 141,563 New Pine Forest Business Center Bldg 1

2 HOUSTON METRO MARKET FIRST QUARTER 217 The EastSoutheast Far submarket drove positive absorption for the Houston metro with 2. million SF driven by tenants such as Katoen Natie, Palmer Logistics and Plantgistix. Over the course of 217, absorption figures should remain strong, particularly within the warehouse/ distribution subsector, as preleased construction is delivered for several large users. Industrial Under Construction Houston Metro 217 SF % PRELEASED EastSoutheast Far 1,477,141 4% VAC A N C Y NW Far 1,388,64 69% Vacancy up in Flex N Far 1,138,25 82% The overall industrial vacancy rate (including sublet) ended the first quarter at 5.1 %, up marginally from at fourth quarter with direct vacancy recording, up from last quarter. First quarter vacancy for warehouse/distribution space was overall and for direct. continues to have the lowest vacancy of any subtype recording for overall and for direct. Unlike it's counterparts, flex didn't fare as well over the quarter. Overall flex vacancy totaled 8.6% with direct vacancy coming in at. The largest change in vacancy stemmed from the South Near Flex submarket with a 2 increase quarteroverquarter, resulting from T3 Energy Services vacating 193, SF. S Far 49,862 63% Southwest Far Large users still driving construction At the close of the first quarter, the Houston industrial market construction pipeline totaled over 4.6 million SF, down from 6.3 million SF at the end of 216. Construction activity fell as the result of one of Ikea s 5, SF new buildings delivering along with over 45, SF delivering in the Ameriport Business Park. The current pipeline is 69% preleased which is driven by large, owneroccupied facilities such as Amazon, FedEx, and Ikea. The East Southeast Far (1.5M SF), Northwest Far (1.4M SF), and North Far (1.1M SF) submarkets accounted for the largest portion of construction activity. Currently, the largest projects under construction are the 9, SF Amazon distribution center in the North Far submarket, the 8, SF FedEx facility in the Northwest Far submarket off Highway 99. The construction pipeline is expected to remain strong with companies as companies continue to expand and break ground on new projects, such as Amazon s new 1. million SF distribution center in Katy. R E N TA L R AT E S 49% Sugar Land 61, 45% N Near 35, 1% NW Near 19, 1% 4,69,893 62% INDUSTRIAL DELIVERIES HOUSTON METRO SF Leased at Delivery % 31% 33% 29% 24% 81% 82% 62% 6% 46% 43% 71% 58% * SOURCE CoStar, Transwestern *Through 217 Multitenant vs Transwestern market coverage Rates continue to increase Rental rates saw another quarter of increases recording $6.91 per SF NNN in the first quarter, up.5% from $6.87 per SF NNN at the end of 216. With vacancy rates remaining tight coupled with quality space delivering to the market, rental rates are expected to push further in the quarters ahead. Quoted base rents for new distribution space are SF Available at Delivery Millions of SF S U P P LY A N D D E V E L O P M E N T MULTITENANT ENTIRE MARKET Inventory 27.6 MSF 56.5 MSF Overall Vacancy 8.5% Net Absorption 1.3 million SF 1.9 million SF WHY OUR METHODOLOGY IS THE BEST INDICATOR OF CURRENT MARKET CONDITIONS We include owner occupied and singletenant buildings in our inventory, vacancy and absorption statistics to capture more market activity than many of our competitors. This allows us to better correlate changes in the market with changes in employment. As singletenant space does compete with multitenant space, we believe it is critical to understand all components of the market. The inclusion of singletenant and owneroccupied space tends to yield lower vacancy rates and higher absorption totals than some of our competitors results, but our coverage of the market is more comprehensive. 2 R E A L E S TATE OUTLOO K HOUST ON MET RO Q 1 217

3 between $4.8 and $5.4 per SF triple net with an allowance of $5. $8. per SF for initial improvements. INVESTMENT SALES Investors keep eyes on Houston The metro recorded $575.1 million in industrial sales transactions during the first quarter, up significantly from $21.1 million during the fourth quarter. While cap rates covered a wide range, depending on the type and class of product, they averaged 7.1% on average in the first quarter. Class A properties continue to be in the 56% range, while Class B rates are the 79% range. Downward pressure on Class A cap rates will likely continue as the economy strengthens and energy prices further stabilize. Active industrial buyers in the Houston market include: Prologis, TA Realty, CABOT, TIAACREF, Crow Holdings, Invesco, Travelers, Industrial Property Trust, Liberty Property Trust, Clarion Partners, Principal, Hillwood, Bentall Kennedy, AEW and GLP. Investors will remain interested in the Houston market over the course of 217, lending to strong investment sale activity. OUTLOOK Industrial looks to continued success As some sectors continue to feel the pain of the recent oil downturn, the industrial sector has displayed strong signs of growth in nearly all statistical areas. Although vacancy increased marginally over the period, it still remains extremely tight and is poised well for more construction projects to enter the pipeline. Even with the challenges in the flex market, it is anticipated that vacancy will hover in the 5% range throughout the year as more supply is delivered to the market. The Petrochemical pipeline has begun to dwindle near Port Houston, but other projects, driven by demand from large users, will keep the construction pipeline strong. With the Purchasing Managers Index (PMI) indicating an expansion in the Houston market for the last six months, the manufacturing sector will bode well in the months ahead. Rental rates are anticipated to remain flat or rise modestly as new supply delivers to the market. Overall, the industrial market looks to continue to thrive, especially as the economy begins to pick back up again. COMPARATIVE INDUSTRIAL INVESTMENT SALES VOLUME SELECT METRO AREAS Sales Volume in Billions InThousands SF $1 $8 $6 $4 $2 $ SOURCE Real Capital Analytics, Transwestern,*Through 217 INDUSTRIAL SUBLEASE LEVELS HOUSTON METRO AREA 5, 4, 3, 2, 1, 6 Atlanta Sublease Space Q2 2 Q3 2 Dallas 1 Q Houston 13 Q Q3 216 Los Angeles 16 Q * 217 SOURCE CoStar, Transwestern Notable Transactions PROPERTY SF SELLER BUYER Underwood Distribution Center EastSoutheast Far 2,167,994 Blackrock Hines West by Northwest 89,196 TH Real Estate Prologis Main Park Business Center Southwest Far 654,352 Cabot Properties DRA Advisors Park 288 South Far 553,638 Nationwide AEW REAL ESTATE OUTLOOK HOUSTON METRO 217 3

4 HOUSTON METRO MARKET FIRST QUARTER 217 Houston Industrial Market Indicators INVENTORY SF AVAILABLE IMMEDIATELY WITH SUBLET 217 UNDER CONSTRUCTION NET ABSORPTION 217 Central Business District 424,37 47, , 6,49, , % 3.9% 3.9% 12, 22,924,813 1,329, % 5.8% (16,) 29,398,641 1,612,669 5.% 5.5% 5.5% (141,) 1,744,917 29,39 9.6% 12.% 12.% 42,8 (42,) 6,49, ,492 3.% 3.% 3.% 48,267,912 3,4, % 6.4% 1,434,341 2,33, 56,62,567 3,431,761 5.% 6.2% 1,477,141 1,991, (4,) Central Business District EastSoutheast Far EastSoutheast Far North Far 7,992,45 647, % 8.1% 8.4% 12, 8,914, ,574 9, 51,364,98 4,622, % 9.% 9.4% 1,18,25 487, 68,272,198 5,733,81 9.% 8.4% 8.7% 1,138,25 456, 1,184,777 98, % (6,) 3,44,74 65,373 2.% 1.9% 1.9% 3, 13,245,169 7, % 35, (26,) 17,87,65 878, % 35, (29,) North Far North Near North Near Northeast Far 22,5.%.%.% 2,72 33, ,381.%.%.% 1,174,61 33,5 (43,) Northeast Far Northeast Near 312,735 63, % 6,291,88.%.%.% 25,33,931 44, % 2.% 45, Northeast Near 31,98, ,35 1.5% 1.8% 2, (17,) Northwest Far * 5,779, , % 6.% 7.3% 14,554,211 35, %,3, 5,249,875 3,165, % 6.3% 6.6% 1,373,34 176, 7,583,869 3,818,168 1,388,64 174, (12,) Northwest Far 11,664, , % 7.7% 7.9% 1,431, ,68 1.3% 1.3% 19, 42, 66,493,781 2,327,282 3.% 3.7% (332,) 88,59,99 3,361,9 3.8% 4.% 19, (32,) SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Includes buildings, SF RBA and greater, does not include buildings under construction or owned by the government See next page for balance of industrial indicators. 4 R E A L E S TATE OUTLOO K HOUST ON MET RO Q 1 217

5 Houston Industrial Market Indicators INVENTORY SF AVAILABLE IMMEDIATELY WITH SUBLET 217 UNDER CONSTRUCTION NET ABSORPTION 217 South Far 1,299,9,599 17, 7,86,696 42,52.6%.6% 78, South Far 22,369,886 7, % 3.2% 257,29 13, 3,756, ,956 3.% 257,29 225, (191,) South Near 674,56 244, % 36.2% 36.2% 1,57,64 16,584 9,493, , % 3.3% 3.3% 85, 11,675, ,38 4.% (16,) South Near Southeast Near 386,732.%.%.% 9,88,7.%.%.% 19,61,71 411,636 (176,) Southeast Near 29,868, ,636.8% (176,) 1,829, ,799 1.% 1 77, 1,79,591 5,129.3%.3%.3% 7,721,2 826, , 11,26,58 1,27,77 9.3% 9.1% 9.2% 143, 6,813, ,11 8.% 8.1% (232,) 3,831, ,222 7.% 7.% (69,) 28,673,82 1,232, % 4.3% 91, Southwest Near 39,319,337 2,46, % (21,) 3,42, ,45 8.8% 8.8% (92,) 2,468,995 76,539 14,139, , % 61, 28, 2,11,13 573, % 2.9% 2.9% 61, (64,) 43,534,11 3,61, % 8.6% 162, (574,) 82,432,731 1,829, % 34,3 9, 38,785,84 19,34,313 4,412,793 2,447, 56,752,546 24,744,419 4,69,893 1,963, Southwest Far Southwest Far Southwest Near Sugar Land Sugar Land Houston Houston SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Includes buildings, SF RBA and greater, does not include buildings under construction or owned by the government CONTACT Stuart Showers Director of Research stuart.showers@transwestern.com METHODOLOGY Rachel Andrae Research Analyst rachel.andrae@transwestern.com The information in this report is the result of a compilation of information on office, industrial, retail, multifamily and healthcare properties located in the Houston metropolitan area. This report includes singletenant, multitenant and owneruser properties and excludes properties owned and occupied by a government agency. Copyright 217 Transwestern. All rights reserved. No part of this work may be reproduced or distributed to third parties without written permission of the copyright owner. The information contained in this report was gathered by Transwestern from various primary and secondary sources believed to be reliable. Transwestern, however, makes no representation concerning the accuracy or completeness of such information and expressly disclaims any responsibility for any inaccuracy contained herein.