Rare Pause no Cause for Concern

HOUSTON—A slow period for industrial move-ins leaves the market slightly in the red, a rare quarter of negative net absorption (only the second time in eight years). It is not unusual for the market to experience wide swings in absorption quarter-to-quarter, occurring in each of the last five quarters.

With the first quarter of 2018 totaling a substantial 2.9 million square feet absorbed, this one-quarter negative blip is not a point of concern because fundamentals remain healthy, says a mid-year report by JLL. At this point in the year, vacancy stands at 4.9%, there is 2.5 million square feet of positive net absorption and 11.8 million square feet of occupiers in the market for space. The strength of the market and availability of capital is driving increased construction particularly of warehouse/distribution product.

“Despite a pause in absorption this quarter, Houston’s industrial market outlook remains strong,” Ryan Fuselier, JLL senior vice president, tells GlobeSt.com. “As evidenced by the large occupiers and national capital sources that we continue to see active in the market, Houston is on everybody’s radar in terms of locating, operating and building distribution centers.”

There is 10.6 million square feet under construction, the fourth consecutive quarter of construction activity growth. In fact, construction is up 80.5% year-over-year and 76.8% of the pipeline is of a speculative nature, fueled by consumer goods demand, petrochemicals and related industries. In addition, six of the largest projects are all larger than a million square feet in size, comprising a third of the construction total.

Occupiers in the market for space are opting for newer product, with four of the five largest leases signed in second quarter transacting in buildings built 2016 or later. Following occupancy losses and new deliveries, vacancy and availability both inched up at mid-year but still remain in line with long-term averages. In the largest deal of the quarter, Grocers Supply inked 727,600 square feet for a build-to-suit in the North submarket.

The industrial sector outlook is strong with healthy leasing activity and rising rents. Tenants are confidently executing long-term commitments for space, and landlords are optimistic given the volume of spec construction underway. The future demand pipeline shows upcoming activity will continue to be fueled by retail and consumer-focused industries. With 11.8 million square feet of occupiers in the market for space, Houston industrial is poised for further growth.