The market for industrial lease space in Houston is gradually improving along with several other economic factors affecting the overall Houston outlook. Houston’s industrial market, strongly dependent on the broader economic recovery, has shown tremendous growth the last few years with more than five million square feet of space added to the marketplace since January 2009.
Construction has slowed considerably in 2010, with only a handful of smaller projects under construction. Most of the projects to break ground have been build-to-suits and owner-occupied facilities. While the list of proposed projects that have been placed “on-hold” or scrapped completely continues to grow, there remains a considerable inventory of available space in newer; larger facilities. Properties built within the last two years have a vacancy rate of about 60 percent, and that group includes several larger properties ranging in size from 500,000 square feet and up.
But positive leasing activity in the last two quarters is a cause for optimism as companies move into the last half of 2010. This activity is fueled in part by both tenants taking advantage of concessions being offered for early renewals and others taking advantage of current concessions to reduce their operating costs. Tenants are contributing to the belief that Houston’s industrial market appears to be weathering the global market’s economic conditions better than other segments of the commercial real estate industry.
Another less scientific positive sign: the increased number of brokers’ email requests for clients looking for specific types of space. This level of requests alone could point to a probable rebound of activity in the industrial market during the last half of the year if the majority of requests turn into completed transactions. Leasing activity appears to be much stronger than last year, with 2009 going on record as one of the least active years in Houston’s history. Sales of industrial properties, are looking up after being almost non-existent in 2009 and 1Q2010. It is important to note that the majority of industrial deals in Houston are normally between 20,000 and 50,000 square feet, although as noted, much larger and newer facilities are available.
Owners are offering various competitive incentives and concessions to tenants who are in a position to take advantage of available space immediately. Industrial rental rates have remained flat throughout the second quarter of 2010 and will probably remain stable through 2010 if the market continues to improve. Sublease space has decreased slightly from first quarter, but many tenants have been holding on during tough economic times and may look to consolidate and decrease their expenses in the future.
Houston’s economy in general is still looking better than other areas of the country, but the effects of the proposed reduction in NASA’s budget for programs at the Johnson Space Center combined with the deep-water drilling moratorium have not yet been felt in the commercial real estate market. Until capital markets improve and the banks start lending more liberally, new construction activity will remain limited. Without capital to fund expansion and build out tenant space, growth will be slow and gradual.
Since its creation in 2001, Commercial Gateway has grown and evolved into the Houston area’s most complete database of commercial real estate for sale and for lease. With more than 1,500 members marketing more than 15,000 listings, this information exchange is a resource without equal. The ability to electronically share project plans, PDF flyers, pictures and advertise available properties has changed the way business is done in Houston.
Patsy Fretwell is a senior market analyst with Commercial Gateway and has more than 20 years of experience in real estate market research. She can be contacted at patsy@commgate.com.
