1Q 2018 Houston Industrial Market Brief

Market Brief...

Houston

INDUSTRIAL

1Q18 Property Pictured Above: 5910 West by Northwest Boulevard, Houston, Texas

HOUSTON INDUSTRIAL MARKET BRIEF 1Q 2018

TABLE OF CONTENTS 1. HOUSTON INDUSTRIAL SUBMARKETS

1 2 3

2. OVERALL HOUSTON MARKET

A. Industrial Trends & Transactions

B. Facts and Figures

2. SUBMARKET INTELLIGENCE

A. Far West & Katy

B. C. D. E. F. G.

Northwest Houston North Houston Near East Houston Port Area South Houston Southwest Houston

3

HOUSTON HLC SUBMARKET COVERAGE

TOMBALL PRAIRIE VIEW SPRING

NORTH 45,865,711 SF

CYPRESS

HUMBLE

GEORGE BUSH INTERCONTINENTAL AIRPORT

LAKE HOUSTON

NORTHWEST 139,946,842 SF MONT BELVIEU

NEAR EAST 47,252,223 SF BROOKSHIRE

KATY

FAR WEST/KATY 15,062,541 SF

SOUTHWEST 45,032,563 SF

HOUSTON SHIP CHANNEL

GALLERIA

PORT AREA 51,852,731 SF

BAY TOWN

PASADENA

MEDICAL CENTER

LA PORTE

SOUTH 38,410,327 SF

SUGAR LAND

HOBBY AIRPORT

ELLINGTON AIRPORT

RICHMOND

TRINITY BAY

MISSOURI CITY

PEARLAND

LEAGUE CITY

HLC HOU

INDUSTRIAL TRENDS & TRANSACTIONS

INDUSTRIAL MARKET EXPERTS

HLC OUTLOOK The Houston industrial real estate market is carrying a large amount of momentum into the second quarter of 2018, and will continue to be one of the strongest markets in the country due to rapid population growth, increasing demand for lastmile distribution, and the resurgence and expansion of the petrochemical industry along the Texas Gulf Coast.

With a vacancy rate of approximately 5.3%, and measured speculative development in the pipeline, leasing fundamentals should remain strong throughout 2018.

TRENDS & TRANSACTIONS • Large distribution warehouses continue to attract strong interest by institutional owners

KELLY LANDWERMEYER

JOHN KRUSE

Managing Principal klandwermeyer@hlhouston.com 713.602.3762

Market Director jkruse@hlhouston.com 713.602.3756

• Speculative development is increasing • Due to continued population growth and consumer demand, e-commerce companies are investing in bulk, last-mile fulfillment centers across the Houston market

Absorption

BRAD SEGRETO

CRAIG BEAN

Market Associate bsegreto@hlhouston.com 713.602.3758

Market Associate cbean@hlhouston.com 713.602.3752

vs. Prev. Qtr

vs. 12 Mths Ago

1,729,695

492,119

2,796,652

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

5.3%

5.3%

5.4%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

3,642,193

6,375,305

6,677,427

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

8,114,230

7,255,120

4,725,828

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

1,772,697

500,000

3,131,531

5

HLC HOU FACTS & FIGURES

Market

Existing Inventory # Bldgs.

Total RBA

4,000,000 3,500,000 3,000,000

5.5% 2,500,000 2,000,000 5.0%

1,500,000 1,000,000

Vacancy Direct SF

OVERALL HOU

6.0%

500,000 4.5%

Total SF

0

Vac. %

-500,000 -1,000,000

4.0%

Far West/Katy

124

15,062,541

543,003

560,439

3.7%

1,656

128,665,166

7,421,803

8,053,754

6.3%

North

629

52,287,442

3,576,475

3,954,736

7.6%

Near East

507

47,252,223

1,648,188

1,670,688

3.5%

Port Area

376

51,852,731

1,300,826

1,608,326

3.1%

Northwest

South

505

38,410,327

1,282,303

1,302,598

3.4%

Q1 15

Q2 15

Q3 15

Q4 15

Q1 16

Q2 16

Q3 16

Absorption

Q4 16

Q1 17

Q2 17

Q3 17

Q4 17

Deliveries

Q1 18

Vacancy

VACANCY - OVERALL HOU 7.0%

5.3%

6.0%

5.0%

4.6%

4.9%

4.5%

4.0%

3.0%

Southwest Totals

632

45,032,563

2,792,319

2,978,189

6.6%

4,429

378,562,993

18,564,917

20,128,730

5.3%

2.0%

1.0%

0.4%

0.1%

0.0% Q1 15

Q2 15

*Vacancy total will differ from overall total slightly due to discrepancies in overall square footage and the sum of each submarket’s square footage.

Q3 15

Q4 15

Q1 16

Q2 16

Q3 16

Direct

Q4 16

Q1 17

Q2 17

Q3 17

Q4 17

Sublet

Q1 18

Total

ABSORPTION - OVERALL HOU 9,000,000 8,000,000

YTD Net Absorption

YTD Deliveries

Under Construction SF

YTD Leasing Activity

Far West/Katy

1,272,696

1,016,000

956,665

76,326

Northwest

-2,198,234

298,100

2,831,782

8,685,460

447,597

0

978,700

696,722

Market

North Near East

-356,456

0

0

270,952

Port Area

621,994

460,402

3,826,490

535,215

South

-13,454

26,520

71,593

230,321

Southwest

-209,574

0

550,000

517,448

7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 -1,000,000 Q1 15

Q2 15

Q3 15

Q4 15

Q1 16

Q2 16

Q3 16

Q4 16

Total Net

Q1 17

Q2 17

Q3 17

Q4 17

Q1 18

Leasing Activity

CONSTRUCTION - OVERALL HOU 9,000,000 8,000,000 7,000,000

Totals

-435,431

1,801,022

9,215,230

11,012,444

6,000,000 5,000,000

Source: CoStar 2018 1Q Industrial Report

4,000,000 3,000,000 2,000,000 1,000,000 0 Q1 15

Q2 15

Q3 15

Q4 15

Q1 16

Q2 16

Delivered Inventory

Q3 16

Q4 16

Q1 17

Q2 17

Q3 17

Q4 17

Q1 18

Under Construction

6

SUBMARKET INTELLIGENCE FAR WEST & KATY

HLC OUTLOOK The Far West/Katy industrial submarket follows along I-10 and stretches from Highway 6 out to Brookshire and up and down the newly developed Grand Parkway. The submarket continues to benefit from the population growth in the communities of West Houston, Cypress, Richmond, Fulshear, Brookshire, and Katy.

15,062,541 SF KATY

BROOKSHIRE

In 2013, Igloo completed its 535,000 SF building and in 2015, Mason Ranch finished its 373,000 SF building which was recently leased to Rooms-To-Go, which also has their 1 million SF distribution center in this submarket. In 2017, FedEx completed its 800,000 SF build-to-suit facility along the Grand Parkway. Perhaps most notable though is that construction recently wrapped up on Amazon’s 1 million SF distribution center in January. The new center is expected to create 1,000 jobs once fully operational.

Absorption

vs. Prev. Qtr

1,282,466

57,562

65,534

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

3.7%

5.8%

8.6%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

48,301

537,004

38,862

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

956,665

1,689,785

1,280,750

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

1,016,000

–

673,785 SF by Oakmont Industrial Group

• Mason Ranch Building II – 2240 N Mason Ranch Road – 282,880 SF by Exeter Property Group

LARGE EXISTING VACANCIES • 800 Koomey Road – 186,306 SF • 1325 S Creek Drive – 76,138 SF

–

VITAL STATS

12.0%

NEW DEVELOPMENTS • Oakmont West 10 – 525 Cane Island Parkway –

vs. 12 Mths Ago

1,325,000

11.0% 1,125,000

10.0% 9.0%

925,000

8.0% 725,000

7.0% 6.0%

525,000

5.0% 325,000

4.0% 3.0%

125,000

2.0% 1.0%

-75,000 Q1 15

Q2 15

Q3 15

Q4 15

Absorption

Q1 16

Q2 16

Q3 16

Q4 16

Deliveries

Q1 17

Q2 17

Q3 17

Q4 17

Q1 18

Vacancy Source: CoStar 2018 1Q Industrial Report

Property Photo: Mason Ranch Building I, CoStar

SUBMARKET INTELLIGENCE NORTHWEST HOUSTON

GEORGE BUSH INTERCONTINENTAL AIRPORT

CYPRESS

HLC OUTLOOK

139,946,842 SF

The Northwest industrial submarket consists of approximately 140 million SF and is generally considered the most desirable submarket in greater Houston for the vast majority of tenants. Regarding new development, the Northwest submarket is the second most active submarket with only the Port submarket experiencing more new development currently. The 2.8 million SF under construction in the Northwest submarket is approximately one-third of the total current construction for the entire Houston industrial market. The vacancy rate for the Northwest submarket was 6.6% at the close of the first quarter.

Looking forward, this submarket will continue to benefit from the rapidly expanding population in communities such as Cypress-Fairbanks, Tomball, and Katy.

HOUSTON

Absorption

vs. Prev. Qtr

-230,620

-922,400

386,102

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

6.3%

5.9%

5.0%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

1,591,542

2,090,019

2,868,612

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

2,831,782

2,166,813

89,500

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

298,100

DEALS ON THE MARKET • 4414 Hollister Road – 234,215 SF – Georgia

vs. 12 Mths Ago

–

Pacific is the seller

• 1530 W Sam Houston Parkway North – 170,040 SF – National Oilwell Varco is the seller

• 4435 W 12th Street – 91,974 SF – Kennametal, Inc. is the seller

• 1501 Seamist Drive & 1440 Greengrass Drive – two

LARGE EXISTING VACANCIES • 9700 W Gulf Bank Road – 245,319 SF • 6315 West by Northwest Boulevard – 201,600 SF • 10901 Tanner Road – 195,951 SF • 6410 Langfield Road Building D – 154,661 SF • 3480 W 11th Street – 154,600 SF • 8802 Fallbrook Drive – 153,000 SF • 9010 West Little York Road – 152,624 SF

buildings totaling 655,763 SF (517,182 SF and 138,581 SF) – Goodman Distribution is the seller

223,628

Property Photo: 8802 Fallbrook Drive, CoStar

VITAL STATS

12.0%

1,400,000 1,200,000

11.0%

1,000,000 800,000

10.0%

600,000 400,000

9.0%

200,000 0

8.0%

-200,000 -400,000

7.0%

-600,000 Q1 15

Q2 15

Q3 15

Absorption

Q4 15

Q1 16

Q2 16

Q3 16

Q4 16

Deliveries

Q1 17

Q2 17

Q3 17

Q4 17

Q1 18

Vacancy Source: CoStar 2018 1Q Industrial Report

NEW DEVELOPMENTS • Cutten Road Business Park – 11833 Cutten Road – 293,280 SF by Clay Development & Construction

• Northwest Logistics Center – 6751 N Eldridge

Parkway – 411,442 SF by Stream Realty Partners

• Union Crossing – 22533 NW Lake Drive – 231,839 SF

by Carson Companies

• West Road Business Park – 8781 West Road Building 5 – 57,996 SF by EastGroup Properties, Inc.

• Fallbrook Pines Business Park – 660,073 SF by Clarion Partners and Trammel Crow

• First 290 at Guhn Road – 6913 Guhn Road – 126,250 SF by First Industrial

SUBMARKET INTELLIGENCE NORTH HOUSTON

HLC OUTLOOK GEORGE BUSH INTERCONTINENTAL AIRPORT

45,865,711 SF

The North Houston industrial submarket—defined as the area between Veterans Memorial Drive and Highway 59— provides a strategic location for companies looking for convenient access to George Bush Intercontinental Airport, as well as three of Houston’s critical thoroughfares: I-45, Sam Houston Tollway (Beltway 8), and Highway 59.

HUMBLE

The North Houston industrial submarket ended 2017 at approximately 93% occupancy after two consecutive quarters of strong absorption. This trend is expected to continue as speculative development activity remains focused on other submarkets and increased leasing velocity continues to chip away at the remaining first generation supply remaining.

As vacancy decreases, rental rates are expected to return to more normal levels.

LAKE HOUSTON

Absorption

vs. Prev. Qtr

447,597

691,832

54,749

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

7.6%

8.4%

10.7%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

696,722

1,130,934

850,208

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

978,700

641,000

975,000

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

0

0

Services is the seller

• 711-713 Rankin Road – 81,014 SF – Gamble Simmons is the seller

NEW DEVELOPMENTS • Pine North Three – 7500 Volta Drive – 337,700 SF

by Duke Realty Corporation

102,715

VITAL STATS

12.0%

DEALS ON THE MARKET • 18727 Kenswick Drive – 150,000 SF – DGM

vs. 12 Mths Ago

1,400,000 1,200,000 1,000,000

11.0%

800,000 10.0%

600,000

9.0%

200,000

400,000

0 -200,000

8.0%

-400,000 7.0%

-600,000 Q1 15

Q2 15

Q3 15

Absorption

Q4 15

Q1 16

Q2 16

Q3 16

Q4 16

Deliveries

Q1 17

Q2 17

Q3 17

Q4 17

Q1 18

Vacancy Source: CoStar 2018 1Q Industrial Report

LARGE EXISTING VACANCIES • 600 Fallbrook Drive – 500,400 SF • 971 N Sam Houston Parkway East – 251,220 SF • 431 E Airtex Drive - 167,238 SF • 18727 Kenswick Drive – 150,000 SF • 1545 Diplomatic Plaza Drive – 125,120 SF

Property Photo: 971 N Sam Houston Parkway East, CoStar

SUBMARKET INTELLIGENCE NEAR EAST HOUSTON

HLC OUTLOOK 47,252,223 SF

HOUSTON SHIP CHANNEL

Houston’s Near East Submarket contains approximately 10% of the metro’s industrial inventory, with a majority of the product constructed 20+ years ago. There has been relatively little new construction in this submarket over the last 20 years as the typical user in this submarket has historically been more price-sensitive relative to other parts of Houston; for this reason, justifying new-construction rents has been a challenge. This submarket borders downtown Houston and runs east, ending just outside of Loop 610.

It enjoys excellent freeway access via I-10, Highway 59, and Loop 610. The Near East submarket has the most active rail infrastructure in Houston, serving the many plants and refineries along the Gulf Coast.

Historically a very stable submarket from an occupancy standpoint, 2017 was a challenge and saw significant negative absorption. This was driven by a downsizing across the pipe and fitting industry and several other large users shuttering their Houston operations or relocating to self-owned real estate outside of the submarket. Meanwhile, there was little in the way of significant positive absorption.

Through the first three months of 2018, activity has increased significantly over 2017 levels, with several larger leases signed to date and more deals pending.

PASADENA

Absorption

vs. Prev. Qtr

vs. 12 Mths Ago

-147,282

-53,789

10,497

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

3.5%

3.2%

4.0%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

214,925

371,908

994,202

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

–

–

–

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

–

–

–

VITAL STATS

5.0%

LARGE EXISTING VACANCIES • 3401 Navigation Boulevard – 238,464 SF • 221 Portwall Street – 162,178 SF • 2015 Turning Basin Drive – 142,791 SF • 4849 Homestead Road – 102,680 SF • 8000 Market Street – 93,600 SF

500,000 400,000

4.0%

300,000

3.0%

100,000

200,000

0 2.0%

-100,000

1.0%

-300,000

0.0%

-500,000

-200,000

-400,000

Q1 15

Q2 15

Q3 15

Absorption

Q4 15

Q1 16

Q2 16

Q3 16

Q4 16

Deliveries

Q1 17

Q2 17

Q3 17

Q4 17

Q1 18

Vacancy Source: CoStar 2018 1Q Industrial Report

Property Photo: 4849 Homestead Road, HLC

SUBMARKET INTELLIGENCE PORT AREA

MONT BELVIEU

HLC OUTLOOK

BAY TOWN

HOUSTON

SHIP CHANNEL

51,852,731 SF

The Port submarket has recently emerged as one of the strongest submarkets in the Houston market with a surge in speculative development and strong absorption. This can be attributed to several factors, including its strategic location near the Port of Houston, proximity to Gulf Coast plants and refineries, and the extensive multi-modal transportation infrastructure in the area, including an extensive rail network. In addition to the spec development, there are a significant amount of proposed build-to-suit developments currently in the submarket.

PASADENA LA PORTE HOBBY AIRPORT

ELLINGTON AIRPORT

Absorption

TRINITY BAY

vs. Prev. Qtr

752,412

1,146,079

2,176,279

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

3.1%

3.7%

4.2%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

526,215

1,265,726

861,786

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

3,326,490

2,738,734

2,206,558

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

460,402

NEW DEVELOPMENTS • Port 10 Logistics Center Phase I – two cross-dock

vs. 12 Mths Ago

500,000

buildings – 485,000 and 295,000 SF respectively

LARGE EXISTING VACANCIES • 10025 Porter Road (Independence Logistics Park) – 94,556 SF

• 1321 W Pasadena Freeway (Carson Commerce Center 5) – 78,490 SF

2,526,498

• 4300 Malone Drive (Bayport North Industrial Park) – 57,359 SF

• 12552 Highway 3 – 50,300 SF

VITAL STATS

7.0%

3,000,000

6.0%

2,500,000

5.0%

2,000,000

4.0%

1,500,000

3.0%

1,000,000

2.0%

500,000

1.0%

0

-500,000

0.0% Q3 15

Q4 15

Q1 16

Absorption

Q2 16

Q3 16

Q4 16

Q1 17

Deliveries

Q2 17

Q3 17

Q4 17

Q1 18

Vacancy Source: CoStar 2018 1Q Industrial Report

Property Photo: 4300 Malone Drive, CoStar

SUBMARKET INTELLIGENCE SOUTH HOUSTON

HOUSTON

SHIP CHANNEL

MEDICAL CENTER

PASADENA

38,410,327 SF

Absorption

vs. Prev. Qtr

LARGE EXISTING VACANCIES • 3203 S Sam Houston Parkway E (South Point

vs. 12 Mths Ago

-13,938

-59,905

-122,072

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

3.4%

3.3%

2.7%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

205,472

70,936

164,655

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

71,593

98,113

26,520

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

26,520

0

64,800

VITAL STATS

7.0%

Business Park Building 2) – 108,000 SF • 9380 Kirby Drive – 65,000 SF • 3440 Sam Houston Parkway E (288 Business Center) – 50,700 SF

3,000,000

6.0%

2,500,000

5.0%

2,000,000

4.0%

1,500,000

3.0%

1,000,000

2.0%

500,000

1.0%

0

0.0%

-500,000 Q3 15

Q4 15

Q1 16

Absorption

Q2 16

Q3 16

Q4 16

Q1 17

Deliveries

Q2 17

Q3 17

HLC OUTLOOK The South submarket is Houston’s smallest. Over the last decade, construction has been sparse, although occupancy rate has stayed well above 95% for much of that time period. In a typical quarter, this submarket will see absorption at or just below zero, and Q1 2018 was no different.

HOBBY AIRPORT

Q4 17

Q1 18

Vacancy Source: CoStar 2018 1Q Industrial Report

Property Photo: 3440 Sam Houston Parkway E, CoStar

SUBMARKET INTELLIGENCE SOUTHWEST HOUSTON

KATY

45,032,563 SF

HOUSTON

HLC OUTLOOK

GALLERIA

MEDICAL CENTER

HOBBY AIRPORT SUGAR LAND

The Southwest industrial submarket has recently experienced an uptick in activity, and investors are bullish on this submarket heading into Q2 2018 and beyond. The business-friendly local governments in Fort Bend County and available Triple Freeport Tax Exemption are just two of the many reasons industrial developers and investors are intrigued by this submarket. The labor demographics in this part of the Houston market are excellent and the rapid population growth will continue to be a driver for absorption and new construction.

RICHMOND MISSOURI CITY

PEARLAND

Absorption

vs. Prev. Qtr

-140,650

43,045

57,713

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

6.6%

6.3%

6.7%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

274,507

945,118

526,315

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

550,000

550,000

112,500

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

0

0

totaling 674,418 SF – Hines is the seller • Stafford Grove Industrial Park – three buildings totaling 352,000 SF – Crow Holdings is the seller

NEW DEVELOPMENTS • 636 Highway 90 (Best Buy Distribution Center)

135,400

VITAL STATS

7.0%

DEALS ON THE MARKET • Beltway Southwest Business Park – four buildings

vs. 12 Mths Ago

1,200,000 1,000,000

6.5%

800,000 6.0%

600,000

5.5%

400,000 200,000

5.0%

0 4.5%

-200,000

4.0%

-400,000 Q1 15

Q2 15

Q3 15

Absorption

Q4 15

Q1 16

Q2 16

Q3 16

Q4 16

Deliveries

Q1 17

Q2 17

Q3 17

Q4 17

Q1 18

Vacancy Source: CoStar 2018 1Q Industrial Report

LARGE EXISTING VACANCIES • 10570 Bissonnet Street – 126,000 SF • 12315 Parc Crest Drive – 66,626 SF

Property Photo: Stafford Grove Industrial Park, CoStar

DALLAS

5055 Keller Springs Road Suite 300 Addison, Texas 75001 T 972.241.8300 F 972.241.7955

FORT WORTH

300 Throckmorton Street Suite 550 Fort Worth, Texas 76102 T 817.710.1110 F 817.810.9017

HOUSTON

11757 Katy Freeway Suite 250 Houston, Texas 77079 T 713.850.8500 F 713.850.8550