Industrial Absorption Slows But Remains Positive

HOUSTON—Industrial occupancy gains hit pause in first quarter, driving weaker fundamentals across the board. And, construction activity declined slightly but remains largely speculative and not yet preleased. However, the pipeline of proposed product continues to grow, given the region’s projected population and industrial economic growth, according to a first quarter report by JLL.

The year began on the right foot with Home Depot’s 770,640-square-foot build-to suit announced at Grand National Business Park in the Northwest submarket. Despite this, however, leasing activity was below average for the second consecutive quarter at 3.7 million square feet.

Outside of new deliveries, occupancy gains were lackluster, leaving net absorption relatively flat at 74,202 square feet. Vacancy and availability rose to 5.4% and 9.3 %, respectively, but do remain at healthy levels compared to long-term averages.

“We’re tracking some really great end-user activity, and the development pipeline is extremely robust. Both end users and developers are viewing Houston as a great place to do business. From our vantage point, everything in the Houston industrial market is all positive,” JLL’s David Buescher tells GlobeSt.com. “In Q1 2019, absorption slowed down but remained positive. I think some of this slow-down can simply be attributed to the length of time necessary to consummate a transaction. Anecdotally, several of the larger transactions we are involved with were scheduled to close in the first quarter but pushed to the second quarter for one reason or another, which isn’t uncommon.”

Average asking rates for all industrial properties held steady at $0.48 per-square-foot triple net and recent deals are still competitive as to what has transacted in the market during the last 12 months. The four largest submarkets remain very active from a development standpoint, with the Southeast and North commanding the largest shares. Both have 3 million square feet of new supply underway.

While the construction pipeline fell marginally in the first quarter, it continues to be largely speculative, 70.7%, and that spec product is minimally preleased. Additionally, the number of proposed industrial buildings has multiplied significantly in recent quarters as capital-rich developers remain on the hunt for sites. These projects are in various stages of permitting and build-out, but several significant tracts have begun site clearing and are expected to break ground in the coming weeks, according to the report.

Looking ahead, end-user demand is expected to be robust, especially in traditionally strong sectors such as consumer goods, plastics, and logistics and distribution. The next few quarters will provide more clarity into the supply-demand balance in the marketplace, depending on which new projects make it out of the ground. The Houston industrial market will likely continue to remain landlord-favorable in the near term, says JLL.