1Q 2020 Houston Industrial Market Brief

Market Brief...

Houston

INDUSTRIAL

1Q2020 Property Pictured Above: Northwest Distribution Center | 7150 Business Park Drive, Houston, Texas 77041

HOUSTON INDUSTRIAL MARKET BRIEF 1Q 2020

WHY HLC’S HOUSTON INDUSTRIAL REPORT IS DIFFERENT At HLC, we believe that customer service and professional expertise are two of the cornerstones to delivering great service to our clients in the real estate industry. And in real estate, professional expertise is achieved largely by having excellent market knowledge. This month, you will receive several reports focusing on Houston’s industrial real estate. These reports will be filled with data and statistics, but will these numbers be the right numbers?

Our market report stands apart because we track and analyze the data unlike most others. Our report contains only statistics for institutionalgrade, dock-high and semi-dock, distribution and flex buildings. Additionally, our report only tracks concrete tilt-wall and masonry buildings, which means all metal construction has been removed from our data set. While grade-level, metal, and manufacturing buildings play an important role in Houston’s industrial market, we believe they should be tracked separately from typical institutional-grade distribution and flex warehouses.

Another significant feature that sets our report apart is our submarket boundaries. We noticed that most of the standard submarket definitions used in CoStar and other market reports are not consistent with how the submarkets actually behave. For example, in East Houston, Interstate 10 serves as the boundary between the NE and SE submarkets in most other reports; but there are dozens of buildings that directly compete on both sides of the freeway. We believe submarkets should show a complete picture of the surrounding competitive set, so we created our own based not on arbitrary physical boundaries like roads or neighborhoods, but on which buildings actually compete against each other within a specific region of the Houston market.

We hope you enjoy reading our report and find the information useful. If you have any questions, please don’t hesitate to call or email a member of our team.

Sincerely,

The HLC Houston Industrial Team

3

HOUSTON INDUSTRIAL MARKET BRIEF 1Q 2020

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

5

HOUSTON HLC SUBMARKET COVERAGE

TOMBALL PRAIRIE VIEW

FAR NORTH 1,637,034 SF

SPRING

GEORGE BUSH INTERCONTINENTAL AIRPORT

CYPRESS

HUMBLE

NORTH 37,492,501 SF

LAKE HOUSTON

NORTHWEST 78,286,507 SF MONT BELVIEU

NEAR EAST 20,993,276 SF BROOKSHIRE

KATY

HOUSTON

SOUTHWEST 26,618,387 SF

FAR WEST/KATY 14,657,567 SF

PORT AREA 43,741,856 SF

CBD 1,454,277 SF

BAY TOWN

SHIP CHANNEL

GALLERIA

MEDICAL CENTER

PASADENA LA PORTE HOBBY AIRPORT

SOUTH 20,527,537 SF

SUGAR LAND

ELLINGTON AIRPORT

RICHMOND

6

MISSOURI CITY

TRINITY BAY

HLC tracks statistics, facts, and figures for institutional-grade industrial and flex warehouses within the submarkets detailed above.

PEARLAND

HLC HOU

INDUSTRIAL TRENDS & TRANSACTIONS HLC OUTLOOK

INDUSTRIAL MARKET EXPERTS

1Q 2020 saw market-wide vacancy for distribution and flex warehouses increase one hundred and eighty basis points to 11.7%. It should be noted that, according to CoStar’s Market Analytics data, the vacancy rate for “logistics” properties was 8.5% at the close of 1Q. And according to CoStar data, the vacancy rate for “specialized industrial” (i.e. manufacturing) buildings in Houston at the close of 1Q was only 3.4%.

The increase in Houston’s vacancy rate is largely due to speculative construction. 8.5M SF of new distribution space was delivered over the first three months of 2020. Comparatively, about 15M SF of new distribution space was delivered in all of 2019. Net absorption increased quarter-over-quarter to 2.8M SF, about a 300K SF increase from 4Q 2019 numbers. Historically, Houston has averaged between 6M and 7M SF of net absorption annually, so we are on track to surpass that benchmark by a wide margin according to 1Q data.

Of course, the COVID-19 pandemic coupled with low energy prices will present some unique challenges that the market will have to overcome in order to stay on this trajectory.

Several large e-commerce requirements continue to remain active market-wide despite the economic headwinds we are experiencing. We expect that vacancy will tick down during 2Q 2020 due to some of these deals landing in currently-vacant buildings in concert with a slow-down in speculative deliveries. The North submarket should benefit the most from this as it currently has the largest amount of new space needing to be absorbed.

CRAIG BEAN

JOHN KRUSE

Senior Vice President Houston Industrial Leasing cbean@holtlunsford.com 713.602.3752

Senior Vice President Houston Industrial Leasing jkruse@holtlunsford.com 713.602.3756

TRENDS & TRANSACTIONS • The North and Port submarkets continue to outpace the rest of the market in both new construction deliveries and absorption.

• The investment sales market has been put on hold due to COVID-19 and low energy prices. For the most part, it appears that longer-term credit-leased assets continue to generate sufficient investor interest to transact. Several deals that were under contract at the beginning of the year have either been dropped or put on hold for now.

• The Houston distribution/logistics sector is experiencing double-digit vacancy for the first time since 1Q 2011. Between 4Q 2008 and 1Q 2011, the market stayed above double-digits for all but one quarter. However, starting in 2Q 2011, vacancy gradually decreased and stabilized between 6% and 7% over the following seven years.

Absorption

KELLY LANDWERMEYER Senior Vice President Houston Industrial Leasing klandwermeyer@holtlunsford.com 713.602.3762

vs. Prev. Qtr

vs. 12 Mths Ago

2,788,636

2,462,627

130,294

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

11.7%

9.9%

8.5%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

3,572,206

4,544,671

5,611,684

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

16,389,351

17,725,209

19,929,570

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

8,524,919

2,648,457

1,828,284

7

HLC HOU FACTS & FIGURES

OVERALL HOU

12.0%

12,000,000 10,000,000

10.0%

8,000,000 8.0%

6,000,000

6.0%

4,000,000 2,000,000

4.0%

Market

Existing Inventory

Vacancy

0

2.0%

(2,000,000) 1Q 17

# Bldgs.

Total RBA

Direct SF

Total SF

Vac. %

Far West/Katy

72

14,657,567

1,436,041

1,473,951

10.1%

Northwest

801

78,286,507

8,434,833

8,925,221

11.4%

North

315

37,492,501

6,918,778

6,995,063

18.7%

Near East

170

20,993,276

1,685,003

1,817,049

8.7%

Port

154

43,741,856

3,997,126

4,331,543

9.9%

South

222

20,527,537

1,847,578

1,870,706

9.1%

Southwest

263

26,618,387

2,892,228

2,985,023

11.2%

Far North

21

1,637,034

162,668

192,668

11.8%

CBD

22

1,454,277

207,819

207,819

14.3%

Totals

2,040

245,408,942

27,582,074

28,799,043

11.7%

2Q 17

3Q 4Q 17 17 Absorption

1Q 18

2Q 18

3Q 4Q 1Q 18 18 19 Deliveries

2Q 19

3Q 19

4Q 1Q 19 20 Vacancy

VACANCY - OVERALL HOU 14.0% 11.7% 11.2%

7.6%

12.0% 10.0% 8.0%

7.2%

6.0% 4.0% 2.0%

0.4%

0.5% 0.0%

1Q 17

2Q 17

3Q 17 Direct

4Q 17

1Q 18

2Q 18

3Q 4Q 18 18 Sublet

1Q 19

2Q 19

3Q 19

4Q 19 Total

1Q 20

ABSORPTION - OVERALL HOU 8,000,000 7,000,000 6,000,000

YTD Deliveries

Under Construction SF

YTD Leasing Activity

81,353

1,082,550

4,536,200

116,226

Northwest

104,348

1,818,027

2,315,243

1,342,466

North

768,732

2,570,960

4,174,056

623,263

Near East

(130,983)

176,201

0

347,218

Port

1,658,540

1,899,587

1,942,267

555,295

South

(52,421)

0

151,342

316,936

25,000,000

Southwest

343,315

977,594

2,410,243

263,667

20,000,000

Far North

15,752

0

860,000

7,135

15,000,000

CBD

0

0

0

0

10,000,000

Totals

2,788,636

8,524,919

16,389,351

3,572,206

5,000,000

Market Far West/Katy

Source: CoStar

8

5,000,000

YTD Net Absorption

4,000,000 3,000,000 2,000,000 1,000,000 0 (1,000,000) 1Q 17

2Q 17

3Q 17

4Q 17

1Q 18

2Q 18

3Q 18

4Q 18

Total Net

1Q 19

2Q 19

3Q 19

4Q 19

1Q 20

Leasing Activity

CONSTRUCTION - OVERALL HOU

0 1Q 17

2Q 17

3Q 17

4Q 17

1Q 2Q 3Q 18 18 18 Delivered Inventory

4Q 18

1Q 2Q 3Q 4Q 19 19 19 19 Under Construction

1Q 20

SUBMARKET INTELLIGENCE FAR WEST & KATY

VITAL STATS

KATY

BROOKSHIRE

14.0%

14,657,567 SF

1,300,000

12.0%

1,100,000

10.0%

900,000

HLC OUTLOOK The Far West submarket follows along Interstate 10 and stretches from Highway 6 out to Brookshire, and up and down the newly developed Grand Parkway. The submarket benefits from rapid population growth in West Houston, Katy and the surrounding communities. Additionally, the submarket’s location along Interstate 10, and proximity to San Antonio and Austin make it an attractive location for new regional e-commerce distribution centers. Prominent tenants and users in this submarket include Medline, Goya Foods, Rooms-to-Go, Amazon, Costco, Academy Sports + Outdoors, and Igloo.

Vacancy increased significantly to 10.1% in 1Q 2020 from 3.5% in 4Q 2019. The main reason is due to the 1,082,550 SF new construction deliveries that occured during 1Q 2020. The submarket did experience positive absorption during 1Q 2020; however, we will need to see even stronger absorption in the coming quarters in order to prevent vacancy from increasing further. Medline occupying their new 1M SF distribution center should help to stem the tide. It will be important to watch whether the larger tenants and users in this submarket decide on a build-to-suit to accommodate future growth versus leasing additional space in speculative building projects.

NEW DEVELOPMENTS • Clay 99 – a 433,200 SF project with Duke Realty • Cane Island Business Center – a 277,400 SF project with Insite Realty & Principal • Ross Dress For Less – a 2M SF build-to-suit development • Medline – a 1M SF build-to-suit development

8.0%

700,000

6.0%

500,000

4.0%

300,000

2.0%

100,000

0.0%

(100,000) 1Q 17

Absorption

• First Grand Parkway | Grand Parkway Commerce Center | Building 1 – 173,045 SF • First Grand Parkway | Grand Parkway Commerce Center | Building 2 – 141,833 SF

3Q 4Q 17 17 Absorption

1Q 18

2Q 18

3Q 18

4Q 1Q 18 19 Deliveries

vs. Prev. Qtr

2Q 19

3Q 19

4Q 1Q 19 20 Vacancy

vs. 12 Mths Ago

81,353

835,928

31,480

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

10.1%

3.5%

6.2%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

116,226

260,295

60,086

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

4,536,200

2,025,380

371,950

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

1,082,550

LARGE EXISTING VACANCIES

2Q 17

548,519

131,954 Source: CoStar

9

SUBMARKET INTELLIGENCE NORTHWEST HOUSTON

SPRING

GEORGE BUSH INTERCONTINENTAL AIRPORT

VITAL STATS

12.0%

HUMBLE

CYPRESS

2,000,000 1,500,000

11.0%

78,286,507 SF

1,000,000 10.0%

500,000

9.0%

KATY

0 -500,000

8.0%

-1,000,000 7.0%

-1,500,000

6.0%

-2,000,000 1Q 17

2Q 3Q 4Q 17 17 17 Absorption

Absorption

1Q 18

2Q 18

3Q 4Q 18 18 Deliveries

vs. Prev. Qtr

1Q 19

2Q 19

3Q 19

4Q 1Q 19 20 Vacancy

vs. 12 Mths Ago

104,348

1,081,179

(409,707)

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

11.4%

9.4%

11.2%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

1,342,466

1,466,994

2,266,965

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

2,315,243

3,749,310

474,040

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

1,818,027

-

384,000 Source: CoStar

10

HOUSTON

HLC OUTLOOK With more than 78M SF of existing distribution/flex product, the Northwest submarket is far and away the largest of the seven major submarkets in Houston. Geographically located north of Interstate 10 along the Highway 290 and West Sam Houston Parkway corridors, the submarket offers somewhat of a “main and main” location for distribution tenants needing to be close to the regional population center. Businesses centered around e-commerce, building supplies, and household services such as plumbing and HVAC repair are all extremely common in Northwest Houston.

The vacancy rate in the Northwest submarket returned to double digits after dipping slightly below during 4Q 2019. It currently stands at 11.4%. Absorption was much lower than the historical mean, coming in at only 104,348 SF. The poor absorption number coupled with almost 2M SF of new deliveries produced a weak quarter for the submarket.

We expect the vacancy rate to trickle down starting in 2Q 2020 due to new deliveries landing deals. In particular, Hines’ Grand National Business Park and Panattoni’s 249 Business Park are both well-located new projects that are garnering significant interest from users. Of interest, there were no new construction starts during 1Q 2020 in the Northwest submarket.

NEW DEVELOPMENTS • Grand National Business Park – a 1,286,740 SF project with Hines • Sam Houston Distribution Center – a 833,720 SF project with Transwestern • 249 Business Park – a 806,360 SF project with Panattoni • Northwest Crossing – a 277,768 SF project with East Group • Telge 290 Logistics Center – a 207,635 SF project with USAA, Archway, and Ridgeline • Windfern Northwest Distribution Center – a 179,200 SF project with Phelan-Bennett Development and GID

LARGE EXISTING VACANCIES • • • • •

9800 Derrington Road – 368,467 SF 3480 W 11th Street – 279,400 SF 4414 Hollister Road – 234,215 SF 10610 Telge Road – 203,060 SF 12202 Cutten Road – 194,602 SF

SUBMARKET INTELLIGENCE NORTH HOUSTON

TOMBALL

SPRING

GEORGE BUSH INTERCONTINENTAL AIRPORT

VITAL STATS

HUMBLE

20.0%

3,000,000

18.0%

2,500,000

16.0%

2,000,000

HLC OUTLOOK

14.0%

1,500,000

The North submarket is defined as the area between Veterans Memorial Drive to the west and Highway 59/Interstate 69 to the east, moving north from Loop 610 all the way to Montgomery County. The submarket provides a strategic location for companies looking for convenient access to George Bush Intercontinental Airport, as well as three of Houston’s most critical thoroughfares: Interstate 45, Sam Houston Parkway, and Highway 59/Interstate 69. This submarket has been one of the fastest growing submarkets in recent years, growing from just over 28M SF of distribution/flex space in 2017 to 37M SF today.

12.0%

1,000,000

10.0%

500,000

LAKE HOUSTON

37,492,501 SF

HOUSTON

2.5M SF of new distribution product was delivered in the North submarket during 1Q 2020.

Absorption lagged behind at 768,732 SF causing vacancy to jump to over 18%. These numbers may seem alarming to most observers, however, it will only take a few large deals to be signed before the numbers improve.

Among the large speculative projects currently on the ground and vacant are USAA’s 685,400 SF Air 59 Logistics Center, Clay Development’s 524,160 SF Kennedy Greens Distribution Center, Duke Realty’s 337,700 SF Point North Three, Avera’s 242,760 SF Park 8, IDI Logistics’ 351,400 SF North Houston Logistics Center Building G, and Davis Commercial Development’s two (2) building, 515,780 SF Cypress Preserve Logistics Center. We continue to believe vacancy will improve drastically as these large blocks of space are leased and we are betting a few of them will find tenants during 2Q 2020.

NEW DEVELOPMENTS • Interwood Distribution Center – a 341,692 SF project with Holt Lunsford Commercial Investments and GID • Parc 59 – a 279,500 SF project with Jackson Shaw and Thackery • Ella West Crossing – a 221,393 SF project with USAA and Seefried

LARGE EXISTING VACANCIES • • • • •

Air 59 Logistics Center – 685,400 SF Cypress Preserve Logistics Center | Buildings 1 & 2 – 516K SF North Houston Logistics Center | 30 Esplanade Boulevard – 351,400 SF Point North Three | 8221 Volta Drive – 337,700 SF Park 8 | 11945 North Freeway – 242,760 SF

8.0%

0 1Q 17

Absorption

2Q 3Q 4Q 17 17 17 Absorption

1Q 18

2Q 18

3Q 4Q 18 18 Deliveries

vs. Prev. Qtr

1Q 19

2Q 19

3Q 19

4Q 1Q 19 20 Vacancy

vs. 12 Mths Ago

768,732

405,201

(9,981)

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

18.7%

14.9%

9.2%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

623,263

640,330

1,334,614

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

4,174,056

4,740,859

5,507,328

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

2,570,960

1,471,609

320,000 Source: CoStar

11

SUBMARKET INTELLIGENCE NEAR EAST HOUSTON

VITAL STATS

9.0%

20,993,276 SF HOUSTON

500,000 8.0% 300,000 7.0%

100,000

6.0%

5.0%

4.0% 2Q 17

3Q 17

4Q 17

1Q 18

2Q 18

3Q 18

Absorption

Absorption

4Q 18

1Q 19

2Q 19

3Q 19

Deliveries

vs. Prev. Qtr

4Q 19

HLC OUTLOOK

(300,000)

The majority of institutional-grade products in the Near East submarket were constructed during the 1970s and 1980s. With limited new construction since that time, average product age in this submarket is one of the oldest in Houston. Historically, this was the lowest priced submarket in Houston and attracted price-sensitive users accordingly. In particular, this submarket appealed to third-party logistics companies. Its widespread rail infrastructure and proximity to the Port of Houston made it the preferred submarket for plastic resin repackagers, though that has diminished in recent years in favor of the Port submarket.

1Q 20

Vacancy

vs. 12 Mths Ago

(130,983)

130,660

(493,569)

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

8.7%

7.3%

8.1%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

347,218

549,642

544,719

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

-

176,201

526,094

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

526,094

-

This submarket has evolved significantly since 2015. Due to tight market conditions with vacancy rates under 3%, second generation rents increased to historically high levels. While still a value option for tenants, the discount compared to other Houston submarkets and to new construction is significantly less than what it was in the past. This led many tenants to vacate the Near East submarket in favor of alternative submarkets, most notably the Port submarket. Though rents for newer product in the Port submarket are higher, those costs are offset by lower drainage expenses, more efficient footprints, and, in the case of resin repackagers, improved rail infrastructure.

Submarket vacancy stood at a mere 3.3% four years ago. Since that time, the submarket has experienced more quarters with negative absorption than positive. The vacancy rate at the end of 1Q 2020 increased to 8.7% as compared to a rate of 7.3% at 2019 year-end. The rate increase was due to a combination of slight negative absorption and the delivery of 176,201 SF of spec product dubbed the Near East Distribution Center located at 8404 East Freeway.

Given the relatively small size of the submarket, without meaningful positive absorption, the vacancy rate will continue to grow over the course of 2020. Of particular note is the expiration of several leases with Conn’s in 3Q 2019. Conn’s vacated all of these properties upon the completion of their new facility in the North Houston submarket and are waiting for those leases to burn off. In total, this will add 608,002 SF of vacancy to the submarket which by itself will increase the submarket vacancy rate by almost 3%.

NEW DEVELOPMENTS Source: CoStar

12

PASADENA

MEDICAL CENTER

(100,000)

(500,000) 1Q 17

176,201

SHIP CHANNEL

• Houston Tradeport – a 526,094 SF project with NorthPoint Development delivered 4Q 2019 • Near East Distribution Center – a 176,201 SF project with Phelan-Bennett Development and Nuveen delivered 1Q 2020

LARGE EXISTING VACANCIES • • • • •

8230 Stedman Street – 526,094 SF 8404 East Freeway – 176,201 SF 8786 Wallisville Road – 137,368 SF 8503 City Park Loop – 114,492 SF 200 Portwall – 110K SF

SUBMARKET INTELLIGENCE PORT AREA

MONT BELVIEU

HOUSTON

43,741,856 SF

VITAL STATS

BAY TOWN

SHIP CHANNEL

GALLERIA

PASADENA

MEDICAL CENTER

10.0%

3,000,000

9.0%

2,500,000

LA PORTE HOBBY AIRPORT

8.0%

ELLINGTON AIRPORT

2,000,000

TRINITY BAY

7.0%

PEARLAND

HLC OUTLOOK The Port submarket is strategically located in close proximity to the Port of Houston’s container terminals, extensive network of refineries and downstream chemical plants, and a widespread multi-modal transportation infrastructure including rail. The submarket allows for quick access to both the Barbours Cut and Bayport container terminals where container shipments enter and exit the Houston market.

After 2 quarters of sharp increases in the vacancy rate, moving from 7% at the end of 2Q 2019 to 9.8% by 2019 year-end, the vacancy rate flattened in 1Q 2020.

Absorption only slightly lagged deliveries, resulting in 1Q vacancy rate of 9.9%. This remains the highest vacancy rate in the submarket over the past 4 years.

New spec developments still in the pipeline will continue to challenge this submarket in the near term. Fortunately, the Port submarket has delivered strong absorption recently, averaging more than 3.6M SF annually for the past three years. The submarket posted an impressive 1Q registering 1.66 M SF in absorption. Additionally, the new development pipeline is cooling off, with just shy of 2 M SF under construction.

• Cedar Port Logistics – a 644K SF project with Avera and AEW • Monument Business Park – a 609,510 two building project with Molto Properties

LARGE EXISTING VACANCIES • 10591 Red Bluff Road – 642,994 SF • 4600 Underwood Road – 402,648 SF • 5335 Cedar Port parkway – 352,559 SF • 10611 Red Bluff Road – 297,400 SF • 13031 Bay Area Boulevard – 296,400 SF • 1770 East Freeway – 260,148 SF

1,000,000

5.0%

500,000

4.0%

0

3.0% 2.0%

(500,000) 1Q 17

The Port submarket is youthful compared to other submarkets with much of the stock constructed in the last 15 years and propelled by the opening of the Bayport Container Terminal. Drivers for the submarket include third party logistics providers (plastic resin repackagers in particular), downstream energy service providers, and retail (ex. Walmart, Home Depot, IKEA).

NEW DEVELOPMENTS

1,500,000

6.0%

Absorption

2Q 3Q 4Q 17 17 17 Absorption

1Q 18

2Q 18

3Q 4Q 1Q 18 18 19 Deliveries

vs. Prev. Qtr

2Q 19

3Q 19

4Q 1Q 19 20 Vacancy

vs. 12 Mths Ago

1,658,540

(115,314)

911,920

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

9.9%

9.8%

7.0%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

555,295

509,777

562,875

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

1,942,267

4,605,246

2,786,468

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

1,899,587

382,938

992,330 Source: CoStar

13

SUBMARKET INTELLIGENCE SOUTH HOUSTON

HOUSTON SHIP CHANNEL

GALLERIA

VITAL STATS

PASADENA

MEDICAL CENTER

10.0%

200,000

9.0%

20,527,537 SF

HOBBY AIRPORT

100,000

8.0% ELLINGTON AIRPORT

0

7.0%

MISSOURI CITY

6.0%

(100,000)

5.0%

(200,000)

HLC OUTLOOK

(300,000)

The South submarket benefits from its proximity to Houston’s Medical Center, just south of downtown, and is defined by a high volume of flex buildings designed to service the wide range of health care providers within the Medical Center. Geographically, the submarket stretches from just north of Loop 610 south to Beltway 8. With more than 21M SF of product, the South submarket is the fifth smallest of the nine major submarkets HLC tracks in Houston. Large portions of this area have not yet been developed, making this submarket potentially the least land-constrained. However, due to the lack of population growth relative to the western submarkets, there has not been a strong demand for new development in this area.

4.0% 3.0% 2.0%

(400,000) 1Q 17

Absorption

2Q 3Q 4Q 17 17 17 Absorption

1Q 18

2Q 18

3Q 4Q 18 18 Deliveries

vs. Prev. Qtr

1Q 19

2Q 19

3Q 19

4Q 1Q 19 20 Vacancy

vs. 12 Mths Ago

(52,421)

94,253

(96,343)

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

9.1%

8.9%

5.9%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

646,834

212,785

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

-

-

-

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

-

At the close of 1Q 2020, vacancy was 9.1% in the South submarket which was a slight increase from 8.9% at the end of 4Q 2019. Absorption for 1Q 2020 was a negative 52,421 SF which is typical in this slower deal velocity submarket. The South submarket continues to feel the effects of the negative 693,343 SF of absorption that occurred during the 2019 calendar year due to several key tenants vacating space, such as Grocers Supply which relocated to the North Submarket.

NEW DEVELOPMENTS

316,936

-

PEARLAND

• South Belt Central | Phase I – a 436,569 SF project with IDV Development • South Point Business Park | Phase II (Amazon BTS) – a +/- 250K SF project with National Property Holdings • Corporate Center Fannin – a 151,342 SF project with Summit Realty Group

Source: CoStar

LARGE EXISTING VACANCIES • 5055 South Loop Freeway – 223,400 SF • 3110 Corder Street – 109,500 SF

14

SUBMARKET INTELLIGENCE SOUTHWEST HOUSTON

HOUSTON

26,618,387 SF GALLERIA

VITAL STATS

MEDICAL CENTER

12.0%

1,200,000

11.0% SUGAR LAND

1,000,000

10.0% 800,000

9.0% RICHMOND

MISSOURI CITY

HLC OUTLOOK The Southwest submarket encompasses most of Southwest Houston outside of Loop 610, stretching from the Westchase area to the north, all the way south to the cities of Stafford and Sugar Land located in Fort Bend County. The submarket has seen steady growth in new construction over the last several years and it continues to increase with new speculative projects breaking ground. The business-friendly local governments in Fort Bend County and available Triple Freeport Tax Exemption are two big reasons why we’ve seen so much activity in the Southwest submarket. Furthermore, the labor demographics in the area are excellent and rapid population growth, which has been the norm for over a decade in Fort Bend County, is expected to continue in this region.

Vacancy was 11.2% at the close of 1Q 2020 which is an increase over 9.2% vacancy rate at the end of 4Q 2019. The significant increase in vacancy is largely due to the 997,594 SF of new construction deliveries that occured during 1Q 2020. While there was positive absorption of 343,315 SFduring 1Q 2020, an increasing new construction supply and leasing challenges related to the effects of COVID-19 and lower oil and gas prices will continue to present obstacles to watch throughout the 2020 calendar year.

NEW DEVELOPMENTS • BLVD Oak Business Park Phase II – a 986,480 SF project with Hines and TA Realty • Waypoint Business Park – a 708,944 SF project with 4M Investments and Clarion • City Park Logistics Center – a 438,202 SF project with Logistics Property Co. • Stafford Crossing – a 334,200 SF project with Transwestern and AEW • Sugar Land Distribution Center – a 315,892 SF project with Johnson Development

LARGE EXISTING VACANCIES

• 611 Cravens Road – 477,355 SF • 1111-1113 Gillingham – 266,663 SF • 13323 South Gessner Road – 141,440 SF

8.0%

600,000

7.0%

400,000

6.0%

200,000

5.0% 0

4.0% 3.0%

(200,000) 1Q 17

Absorption

2Q 3Q 4Q 17 17 17 Absorption

1Q 18

2Q 18

3Q 4Q 18 18 Deliveries

vs. Prev. Qtr

1Q 19

2Q 19

3Q 19

4Q 1Q 19 20 Vacancy

vs. 12 Mths Ago

343,315

47,962

171,533

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

11.2%

9.2%

3.9%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

263,667

468,428

343,707

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

2,410,243

2,428,213

2,315,851

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

977,594

169,641

Source: CoStar

15

DALLAS

5950 Berkshire Lane Suite 900 Dallas, Texas 75225 T 972.241.8300 F 972.241.7955

FORT WORTH

1200 Summit Avenue Suite 300 Fort Worth, Texas 76102 T 817.710.1110 F 817.810.9017

www.holtlunsford.com

HOUSTON

11451 Katy Freeway Suite 300 Houston, Texas 77079 T 713.850.8500 F 713.850.8550