3Q 2020 Houston Industrial Market Brief

Market Brief...

Houston

INDUSTRIAL

3Q2020 Property Pictured Above: Interwood Distribution Center | 14710 & 14720 John F. Kennedy Boulevaard, Houston, Texas 77032

1

HOUSTON INDUSTRIAL MARKET BRIEF 3Q 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. 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 data unlike most others. Our report contains only statistics for institutional-grade 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 3Q 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

4

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

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

HOUSTON HLC SUBMARKET COVERAGE

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

5

HLC HOU

INDUSTRIAL TRENDS & TRANSACTIONS HLC OUTLOOK

INDUSTRIAL MARKET EXPERTS

Market-wide vacancy for distribution and flex product stood at 11.8% at the end of 3Q 2020. Net absorption in 3Q 2020 was 1,623,271 SF, bringing the YTD total for Houston to roughly 7.5M SF. 2020 will almost certainly be a record year for net absorption in the Houston market. However, with speculative construction also setting records over the last several quarters, the vacancy factor has continued to rise steadily.

In addition to the historical levels of new construction, the COVID-19 pandemic, a lackluster oil and gas market, and the presidential election have all contributed to the headwinds the Houston industrial market has experienced as of late. Many companies have decided to pause or delay real estate decisions in 2020 meaning that less deals are getting done than otherwise would be. However, activity has remained strong market-wide mainly due to an uptick in e-commerce, consumer goods, and building products companies leasing space. We expect this trend to continue into 2021 and beyond.

Another positive sign is the decrease in the amount of square footage under construction at the end of 3Q 2020.

While the total number under construction has been more than 16M SF for six consecutive quarters, it dropped down to 12.4M SF in 3Q 2020. This is a result of a handful of projects being put on hold, as well as various sources of capital taking a wait-and-see approach in response to the large amount of already-delivered vacant product.

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 Southwest submarket saw vacancy increase markedly to 14.8% in 3Q 2020. This increase is due to the delivery of 1.6M SF of new product with only 29,654 SF of net absorption.

• The Port submarket remained in double-digit vacancy territory for a second straight quarter mainly due to negative absorption. With more than 3M SF still under construction and a heavy reliance on the downstream petrochemical plants, the Port submarket will need to see a barrage of leasing activity in that industry to avoid vacancy climbing further.

• The investment sales market saw a significant increase in activity during 3Q 2020 with several new deals hitting the market in an effort to complete transactions before the end of the year. Where pricing ends up on these sales will be a good barometer of where the market is currently, and we expect cap rates to remain low.

Absorption

KELLY LANDWERMEYER

CARTER HOLMES

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

Market Analyst Houston Industrial Leasing cholmes@holtlunsford.com 713.602.3751

6

vs. Prev. Qtr

vs. 12 Mths Ago

1,623,271

3,595,719

1,428,145

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

11.8%

11.1%

9.0%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

4,174,868

4,445,218

6,593,658

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

13,385,527

16,504,936

18,066,866

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

4,095,924

6,090,995

3,794,146

HLC HOU FACTS & FIGURES

OVERALL HOU

13.0%

9,000,000

12.0%

8,000,000

11.0%

7,000,000 6,000,000

10.0%

5,000,000

9.0%

4,000,000 8.0%

3,000,000

7.0%

Market

Existing Inventory

Vacancy

2,000,000

6.0%

1,000,000

5.0%

# Bldgs.

Total RBA

Direct SF

Total SF

Vac. %

Far West

76

15,456,933

1,613,847

1,617,685

10.5%

Northwest

1,295

104,831,520

10,339,239

10,899,647

10.4%

North

531

48,792,127

7,880,340

7,940,531

16.3%

Far North

30

3,977,694

144,670

144,670

3.6%

Near East

319

29,495,256

2,496,399

2,532,657

8.6%

Port

225

48,421,486

6,129,512

6,359,612

13.1%

South

328

22,891,491

1,811,868

1,856,868

8.1%

Southwest

288

31,012,181

4,566,511

4,577,558

14.8%

3,092

304,878,688

34,982,386

35,929,228

11.8%

0

4.0%

(1,000,000) 3Q 17

4Q 17

1Q 18

2Q 18

3Q 18

4Q 18

1Q 19

Absorption

2Q 19

3Q 19

4Q 19

1Q 20

2Q 20

Deliveries

3Q 20

Vacancy

VACANCY - OVERALL HOU 14.0% 11.8%

10.0% 8.0%

6.8%

6.0%

6.4%

Totals

12.0%

11.5%

4.0% 2.0% 0.3%

0.3% 0.0%

3Q 17

4Q 17

1Q 18

2Q 18

3Q 18

4Q 18

1Q 19

Direct

2Q 19

3Q 19

4Q 19

1Q 20

2Q 20

Sublet

3Q 20

Total

ABSORPTION - OVERALL HOU 8,000,000 7,000,000 6,000,000 5,000,000

YTD Net Absorption

YTD Deliveries

Under Construction SF

YTD Leasing Activity

Far West

660,860

1,786,450

3,998,687

1,117,031

Northwest

1,793,348

4,051,246

1,451,768

4,612,542

North

1,057,991

3,581,889

2,307,179

2,227,217

Far North

909,870

860,000

1,249,335

170,770

Near East

(168,440)

176,201

0

2,551,280

Port

1,210,661

3,982,415

2,524,967

1,627,062

25,000,000

South

423,991

240,504

0

856,516

20,000,000

Southwest

1,694,050

3,780,070

1,853,591

640,620

15,000,000

Totals

7,582,331

18,458,775

13,385,527

13,803,038

10,000,000

Market

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

4Q 17

1Q 18

2Q 18

3Q 18

4Q 18

1Q 19

2Q 19

3Q 19

Total Net

4Q 19

1Q 20

2Q 20

3Q 20

Leasing Activity

CONSTRUCTION - OVERALL HOU

5,000,000

Source: CoStar

0 3Q 17

4Q 17

1Q 18

2Q 18

3Q 18

4Q 18

1Q 19

Delivered Inventory

2Q 19

3Q 19

4Q 19

1Q 20

2Q 20

3Q 20

Under Construction

7

SUBMARKET INTELLIGENCE FAR WEST

VITAL STATS 14.0%

1,600,000

BROOKSHIRE

KATY

1,400,000

12.0%

15,456,933 SF

1,200,000 10.0% 1,000,000 8.0%

800,000

6.0%

600,000 400,000

4.0% 200,000 2.0%

0

0.0%

(200,000) 3Q 17

4Q 17

1Q 18

2Q 18

3Q 18

4Q 18

1Q 19

Absorption

Absorption

2Q 19

3Q 19

4Q 19

1Q 20

2Q 20

Deliveries

vs. Prev. Qtr

3Q 20

Vacancy

vs. 12 Mths Ago

545,910

15,372

33,382

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

10.5%

11.1%

5.9%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

45,323

149,881

554,594

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

3,998,687

5,572,257

1,082,550

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

498,700

205,200

Source: CoStar

HLC OUTLOOK

The Far West submarket follows along Interstate 10, stretches from Highway 6 out past 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 decreased modestly to 10.5% in 3Q 2020 from 11.1% in 2Q 2020. The Far West submarket experienced a positive 545,910 SF of absorption during 3Q 2020 with YTD total being a positive 660,860 SF. The new supply within the submarket continues to increase with 498,700 SF of deliveries during 3Q 2020 and a 1,786,450 SF YTD total. We will need even stronger absorption in the coming quarters to prevent vacancy from increasing in future quarters. The 3,998,687 SF under construction at the end of 3Q 2020 in the Far West submarket is the most in the metro. It is important to note that several large build-to-suits or user-owned buildings account for a large portion of the under construction projects. It will be important to watch whether the larger tenants and users in this submarket decide on a design-build to accommodate future growth versus leasing additional space in speculative projects.

NEW DEVELOPMENTS • • • •

Ross Dress For Less – a 2.1M SF owner-user development Medline – a 1.3M SF owner-user development Empire West Business Park (Phase 1) – a 1,036,057 SF project with Stream Realty The Uplands Twinwood DC 1 – a 737,630 SF project with Clay Development

LARGE EXISTING VACANCIES • Clay 99 Building Five – 433,200 SF • Pederson Distribution Center – 205K SF • First Grand Parkway Building 1 – 173,045 SF

8

SUGAR LAND

SUBMARKET INTELLIGENCE NORTHWEST HOUSTON

MAGNOLIA

THE WOODLANDS

PRAIRIE VIEW

TOMBALL

VITAL STATS

SPRING

GEORGE BUSH INTERCONTINENTAL AIRPORT

CYPRESS

14.0%

2,500,000

104,831,520

2,000,000

12.0%

1,500,000 BROOKSHIRE

KATY

HOUSTON

10.0%

1,000,000

GALLERIA

8.0%

HLC OUTLOOK The Northwest submarket is far and away the largest of the eight submarkets HLC tracks in Houston. Geographically located north of Interstate 10 along the Highway 290 and West Sam Houston Parkway corridors, the submarket has historically offered a “main and main” location for distribution tenants needing to be close to the regional population center.

The vacancy rate in the Northwest submarket stood at 10.4% at the close of 3Q 2020 which is a slight decrease from 2Q 2020. YTD net absorption has been strong at nearly 1.8M SF total. Additionally, the submarket has seen more than 4M SF in YTD deliveries. Over half of those deliveries occurred in the 1Q 2020 which caused vacancy to jump into double-digits.

With only 847,110 SF of new product under construction at the end of 3Q 2020, if absorption remains strong, we may see the vacancy dip back below 10% by the end of the year.

NEW DEVELOPMENTS • Sam Houston Distribution Center – an 833,720 SF development with Transwestern • 249 Business Park – an 806,360 SF development with Panattoni • Telge 290 Logistics Center – a 207,635 SF development with USAA, Archway, and Ridgeline • Windfern Northwest Distribution Center – a 179,200 SF development with PhelanBennett Development and GID

LARGE EXISTING VACANCIES • • • • • •

Sam Houston Distribution Center Building 2 – 368,467 SF 9800 Derrington Road – 368,467 SF 7301-7401 Security Way – 296,839 SF 4414 Hollister Road – 234,215 SF Telge 290 Logistics Center – 207,635 SF Sam Houston Distribution Center Building 1 – 200,200 SF

500,000 0

6.0%

-500,000 4.0%

-1,000,000

2.0%

-1,500,000 3Q 17

4Q 17

1Q 18

2Q 18

3Q 18

4Q 18

Absorption

Absorption

1Q 19

2Q 19

Deliveries

vs. Prev. Qtr

3Q 19

4Q 19

1Q 20

2Q 20

3Q 20

Vacancy

vs. 12 Mths Ago

1,112,323

431,195

853,100

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

10.4%

10.6%

9.6%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

1,242,157

1,468,128

2,639,317

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

1,451,768

1,445,226

3,608,910

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

1,051,336

942,285

519,991 Source: CoStar

9

SUBMARKET INTELLIGENCE NORTH HOUSTON

VITAL STATS

SPRING

18.0% 2,600,000

16.0%

48,792,127 SF

12.0%

1,600,000

10.0%

1,100,000

8.0%

600,000

6.0%

100,000

4.0%

(400,000) 3Q 17

4Q 17

1Q 18

2Q 18

3Q 18

4Q 18

Absorption

Absorption

1Q 19

2Q 19

Deliveries

vs. Prev. Qtr

3Q 19

4Q 19

1Q 20

2Q 20

3Q 20

Vacancy

vs. 12 Mths Ago

26,251

325,463

307,548

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

16.3%

15.4%

10.3%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

915,595

516,394

722,098

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

2,307,179

3,778,667

5,227,530

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

449,286

1,921,180 Source: CoStar

10

HUMBLE

2,100,000

14.0%

561,643

GEORGE BUSH INTERCONTINENTAL AIRPORT

LAKE HOUSTON

HLC OUTLOOK The North 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.

3Q 2020 saw vacancy tick up to 16.3% in the North submarket as the historic levels of new construction continue to create challenges. The good news is only 561,643 SF of new product was delivered during the 3Q 2020 which means that for two quarters in a row we’ve seen well under 1M SF of building deliveries. YTD net absorption is 1,057,991 SF and YTD leasing activity is 2,227,217 SF. We will need to see some large blocks of vacant space leased before the vacancy number in the North submarket will return to single digits. Large speculative projects currently on the ground and vacant include USAA’s 685,400 SF Air 59 Logistics Center, Clay Development’s 524,160 SF Kennedy Greens Distribution Center, Davis Commercial Development’s two (2) building 515,780 SF Cypress Preserve Logistics Center, and IDI Logistics’ 351,400 SF North Houston Logistics Center Building G.

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 Kennedy Greens Distribution Center – 524,160 SF Cypress Preserve Logistics Center | Buildings 1 & 2 – 515,780 SF North Houston Logistics Center Building G – 351,400 SF

SUBMARKET INTELLIGENCE FAR NORTH

WILLIS LAKE CONROE

MONTGOMERY

CLEVELAND

CONROE

VITAL STATS

3,977,694 SF 8.0%

MAGNOLIA

THE WOODLANDS

PRAIRIE VIEW

900,000

NEW CANEY

7.0%

TOMBALL SPRING

DAYTON

HUMBLE

6.0%

700,000

5.0%

500,000

4.0%

HLC OUTLOOK

3.0%

The Far North submarket begins at the southern edge of Montgomery County and stretches north all the way past Conroe. Population growth and access to the DFW market are just a couple of attributes that make the Far North attractive to end users. This emerging submarket consists of a handful of large retail tenants recently electing to construct distribution centers here.

2.0%

Vacancy was 3.6% at the end of 3Q 2020 in the Far North submarket. With only 4M SF of institutional product, the Far North submarket does not get much attention. However, several large companies have recently either moved forward with, or are considering, constructing large distribution centers here. If this area of the Houston metro continues to pick up traction as a destination for big box distribution centers, we could see speculative construction gain traction here. As of now, almost all new activity has been of the owneruser or build-to-suit variety.

NEW DEVELOPMENTS • Five Below Distribution Center – an 860K SF owner-user development

300,000

100,000

-100,000

1.0% 0.0%

-300,000 3Q 17

4Q 17

1Q 18

2Q 18

3Q 18

4Q 18

1Q 19

Absorption

Absorption

2Q 19

3Q 19

4Q 19

1Q 20

Deliveries

vs. Prev. Qtr

2Q 20

3Q 20

Vacancy

vs. 12 Mths Ago

30,000

866,278

4,915

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

3.6%

4.4%

5.7%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

2,160

161,475

2,850

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

1,249,335

145,210

-

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

-

860,000

Source: CoStar

11

SUBMARKET INTELLIGENCE NEAR EAST HOUSTON

VITAL STATS

29,495,256 SF

HOUSTON

10.0%

500,000

8.0%

300,000 SHIP CHANNEL

6.0%

100,000

4.0%

(100,000)

2.0%

(300,000)

MEDICAL CENTER PASADENA

0.0%

(500,000) 3Q 17

4Q 17

1Q 18

2Q 18

3Q 18

4Q 18

1Q 19

Absorption

Absorption

2Q 19

3Q 19

4Q 19

1Q 20

Deliveries

vs. Prev. Qtr

2Q 20

3Q 20

Vacancy

vs. 12 Mths Ago

(43,962)

(218,568)

27,147

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

8.6%

8.4%

8.0%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

571,015

965,491

798,081

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

-

-

702,295

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

-

526,094

The majority of Industrial product in the Near East submarket was constructed during the 1970s and 1980s. With limited new construction since that time, the 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. 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 greatly diminished in recent years in favor of the Port submarket.

This submarket has evolved significantly since 2015. In response to sub-3% vacancy rates for 2 straight years from 2014 to 2016, rents increased to historically high levels. While still a value option for tenants, the discount compared to other Houston submarkets and to new construction significantly diminished. This resulted in many tenants vacating the Near East submarket in favor of alternative submarkets, most notably the Port. Though rents for newer product in the Port submarket are higher, those costs are offset by lower drayage expenses, more efficient footprints, trailer storage, and in the case of resin repackagers, improved rail infrastructure.

Since the beginning of 2016, the vacancy rate has increased from 1.8% to 8.6% at the end of 3Q 2020. After sharp vacancy increases from 2016 to 2018, increases in the vacancy rate flattened beginning in 2019 and have continued a slow drift upward. It is notable that there were two new speculative developments delivered over the past two years, which, when combined, resulted in a 2.5% increase in the vacancy rate. The amount of occupied space was virtually unchanged during 3Q 2020.

Although there is no new supply in the pipeline, there could be modest challenges for the Near East in the short term. Specifically, there are a few larger anticipated move-outs that will put upward pressure on the vacancy rate unless there is offsetting absorption.

LARGE EXISTING VACANCIES

Source: CoStar

12

HLC OUTLOOK

• • • • •

8230 Stedman Street (Houston Tradeport) – 468,922 SF 8550A Market Street – 231,800 SF 8404 East Freeway (Near East Distribution Center) – 176,201 SF 8786 Wallisville Road – 137,368 SF 2425 Turning Basin – 127,046 SF

SUBMARKET INTELLIGENCE PORT AREA

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.

DAYTON

HUMBLE

VITAL STATS LAKE HOUSTON

48,421,486 SF

MONT BELVIEU

BAY TOWN

14.0%

3,000,000

12.0%

2,500,000

10.0%

2,000,000

8.0%

1,500,000

6.0%

1,000,000

4.0%

500,000

2.0%

0

SHIP CHANNEL

The Port submarket is relatively young compared to other submarkets with more than half of the existing inventory constructed in the last decade. 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).

PASADENA LA PORTE

0.0% TRINITY BAY

4Q 17

1Q 18

2Q 18

3Q 18

4Q 18

1Q 19

Absorption

2Q 19

Deliveries

3Q 19

4Q 19

1Q 20

2Q 20

3Q 20

Vacancy

LEAGUE CITY

As anticipated, the vacancy rate in the Port submarket continued to increase and ended 3Q 2020 over 13% as deliveries again outpaced absorption. Since the beginning of the year, just under 4M SF of product has been delivered. This is in line with the trailing three-year average for deliveries of 4.7M SF per year. Notably, over the past 12 quarters, absorption has lagged deliveries eight times.

Looking forward, market conditions may stabilize but this will be dependent on absorption trends and construction starts. The new development pipeline has cooled slightly with only 3,163,727 SF under construction currently. However, by our count, there is an additional 4M SF of proposed projects on the drawing boards but not yet under construction.

NEW DEVELOPMENTS • Cedar Port Trade Center – a 1,021,440 SF development with Hunt Southwest • Monument Business Park – a 609,510 two (2) building project with Molto Properties

Absorption

LARGE EXISTING VACANCIES Bay Area Business Park Building 10 | 10629 Red Bluff – 784,000 SF Cedar Port Logistics | 4725 E Grand Parkway South – 644,000 SF Bayport South | 10591 Red Bluff Road – 642,994 SF 5335 Cedar Port Parkway – 352,559 SF

vs. Prev. Qtr

vs. 12 Mths Ago

(283,758)

546,054

269,564

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

13.1%

12.3%

8.3%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

455,355

582,562

865,589

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

2,524,967

1,387,338

4,308,424

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

141,265 • • • •

(500,000) 3Q 17

ELLINGTON AIRPORT

2,434,224

726,627 Source: CoStar

13

SUBMARKET INTELLIGENCE SOUTH HOUSTON

GALLERIA MEDICAL CENTER PASADENA

VITAL STATS

SOUTHWEST 31,012,181 SF

10.0%

HOBBY AIRPORT

500,000 400,000

8.0%

22,891,491 SF

300,000

PEARLAND

200,000 6.0%

100,000 0

4.0%

(100,000) (200,000)

2.0%

(300,000) (400,000)

0.0%

(500,000) 3Q 17

4Q 17

1Q 18

2Q 18

3Q 18

4Q 18

Absorption

Absorption

1Q 19

2Q 19

3Q 19

4Q 19

1Q 20

Deliveries

vs. Prev. Qtr

2Q 20

3Q 20

Vacancy

vs. 12 Mths Ago

206,853

309,214

(376,114)

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

8.1%

8.0%

9.7%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

237,835

154,091

528,298

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

757,222

-

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

-

-

At the close of 3Q 2020, vacancy was 8.1% in the South submarket which was a modest increase from 8.0% at the end of 2Q 2020. YTD absorption through 3Q 2020 was a positive 423,991 SF which is noteworthy considering the South submarket has only posted positive quarterly absorption on four separate occasions in the last three years. The South submarket continues to feel the effects of the negative 1,021,837 SF of absorption that occurred during the 2018 and 2019 calendar years due to several key tenants vacating the submarket, such as Grocers Supply which relocated to North Houston. There have been 240,504 SF of deliveries YTD in the South with the only significant completion being the 200,400 SF Amazon build-to-suit at National Property Holdings’ South Point Business Park. Several upcoming new developments ,such as IDV’s South Belt Central and Summit Realty Group’s Corporate Center Fannin, have reportedly been put on hold until 2021.

• South Belt Central | Phase I – a 436,569 SF development with IDV (On Hold) • South Point Business Park | Phase II | Amazon BTS – a +/- 200,400 SF development with National Property Holdings • Corporate Center Fannin – a 151,342 SF development with Summit Realty Group (On Hold)

LARGE EXISTING VACANCIES Source: CoStar

14

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 past Beltway 8. 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 northern and western submarkets, there has not been a strong demand for new development in this area.

NEW DEVELOPMENTS

240,504

HLC OUTLOOK

• 5055 S Loop Freeway E – 133,077 SF • 3110 Corder Street – 109,500 SF • 5901 Griggs Road – 101,707 SF

SUBMARKET INTELLIGENCE SOUTHWEST HOUSTON

BROOKSHIRE

KATY

GALLERIA

VITAL STATS

SUGAR LAND

16.0%

31,012,181 SF

1,800,000

14.0%

RICHMOND MISSOURI CITY

12.0% 1,300,000

HLC OUTLOOK

10.0%

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 outlying suburbs of Fort Bend County. The submarket has seen steady growth in new construction over the last several years. The business-friendly local governments in Fort Bend County and available Triple Freeport Tax Exemption are two big reasons why we have 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 14.8% at the close of 3Q 2020 which is an increase from the 10.2% vacancy rate at the end of 2Q 2020. The increase in vacancy is largely due to the 1,602,476 SF of new deliveries that occured in 3Q 2020. Positive absorption of 1,694,050 SF YTD through 3Q 2020 has not been enough to keep up with the increasing supply. The 1,853,591 SF under construction in the submarket at the close of 3Q 2020 is a decrease in comparison to both 1Q 2020 and 2Q 2020.The decreasing number of new buildings under construction should help both the vacancy and absorption numbers in the upcoming quarters.

NEW DEVELOPMENTS • Boulevard Oaks Business Park | Phase II – a 986,480 SF development with Hines and TA Realty • Waypoint Business Park – a 708,944 SF development with 4M Investments and Clarion • City Park Logistics Center – a 438,202 SF development with Logistics Property Company • Stafford Crossing – a 334,200 SF development with Transwestern and AEW • Sugar Land Crossroads – a 326,807 SF development with Transwestern and Diamond Realty Investments

LARGE EXISTING VACANCIES

• Boulevard Oaks Business Park Building 8 – 532,440 SF • Southwest Commerce Center | 611 S Cravens Road – 477,355 SF • Waypoint Business Park Building 1 | 411 Cravens Road – 290,373 SF • 1111-1113 Gillingham Lane – 266,663 SF

8.0%

800,000

6.0% 4.0%

300,000

2.0% 0.0%

(200,000) 3Q 17

4Q 17

1Q 18

2Q 18

3Q 18

4Q 18

1Q 19

Absorption

Absorption

2Q 19

Deliveries

vs. Prev. Qtr

3Q 19

4Q 19

1Q 20

2Q 20

3Q 20

Vacancy

vs. 12 Mths Ago

29,654

1,320,711

308,603

Vacancy

vs. Prev. Qtr

vs. 12 Mths Ago

14.8%

10.2%

8.1%

Leasing Act.

vs. Prev. Qtr

vs. 12 Mths Ago

705,428

447,196

482,831

U/C SF

vs. Prev. Qtr

vs. 12 Mths Ago

1,853,591

2,114,586

3,137,157

Delivered SF

vs. Prev. Qtr

vs. 12 Mths Ago

1,602,476

1,200,000

626,348 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

16