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Q4 2018 INDUSTRIAL MARKET REPORTTRENDING NOWThe trend of tight absorption rates was helped, in large part, by the 11 million-square-foot of space being delivered in 2018 with 80% of it being filled. The fourth quarter saw a large space taken down by Southern Glazer’s Wine and Spirts, and a buyer taking large heavy industrial space totaling 447,605-square-feet in the Greens Port Industrial Park. Asking lease rates have gone up in the fourth quarter by approximately 2% on the net basis overall compared to 3rd quarter, and the trend should continue through the first half of 2019. Net absorption per Costar Industrial Statistics was a positive 2,577,450 square feet.The west side of the greater Houston market is where industrial sector had the most leasing activity. Approximately 4 leases over 50,000 square feet were absorbed with the largest lease being a renewal of a cold storage facility in the Northwest Corridor.
October of 2018 was the month the largest tax incentive in history of the IRS was announced in the form of Opportunity Zones. One hundred and fifty zones wereapproved in the Houston Metro area, but the government shut down has prevented the next announce of how to navigate the re-investment of capital gains into real estate assets in designated areas, has prevented acquisition rates from going higher. Cap rates were pushed higher by an average of three basis point which is great sign that the Houston industrial market can absorb a 100 basis points increase in the Fed rate and still be attractive to investors. Expectations for rising rental rates could keep pressure on cap rates, so investors can take comfort in the market having demand for space and tenants will have to more for properties positioned correctly.
Port Houston along with Port of Freeport and Port of Texas City are spending billions of dollars in civil and structural improvements to take advantage of the Global demand for chemical and refined carbon products. The demand for long haul truck drives, diesel mechanics and road improvements reflect a bottle neck of demand for warehouse users and developers. Container terminals reached and surpassed the 2 million TEU mark in a single year and are positioned to top the 3 million mark - perhaps as early as 2020 and overall tonnage is up 8%, per the Port of Houston’s public statement. The port of Freeport passed a $130,000,000 bond in May of 2018 which will make the port the deepest in Texas. The southern industrial corridor had an average of $.53 cents which will hold steady with more cheap land develop than any other Houston submarket.
CONSTRUCTION: Construction starts in metro Houston totaled $1.19 billion in November ’18, a 4.8 percent decline from $1.25 billion in November ’17. Through the 12 months ending November ‘18, starts totaled $20.6 billion, up 14.2 percent from $18.0 billion for the previous 12 months.
BUILDING PERMITS: City of Houston building permits totaled $475.6 million in November ‘18, down 26.0 percent from $642.4 million in November ‘17. For the 12 months ending November ‘18, city permits totaled $6.1 billion, up 2.6 percent from $6.0 billion in the 12 months ending November ‘17.
TRADE: Growth in the Houston Business-Cycle Index was 6.8 percent during the three months ending in September ‘18, continuing its healthy expansion from the first half of the year.
Rig CountAs of 01/17/2019
Source: Baker Hughes Rig Count Overview & Summary
United States Last Count January 11, 2019 Count 1,075 Change from Prior Count +0 Change from Last Year +136
WTI PriceAs of 01/17/2019
WTI Crude Oil (Nymex) Units USD/bbl. Price $52.32 Change +0.01 % Change +0.02% Contract Feb 2019
Source: Bloomberg Markets Energy Markets / Crude Oil & Natural Gas
VACANCY
NET ABSORPTION
RENTAL RATE
Q2 2018 Q3 2018 Q4 2018
Q2 2018 Q3 2018 Q4 2018
Q2 2018 Q3 2018 Q4 2018
MARKETEXISTING INVENTORY VACANCY YTD NET
ABSORPTIONYTD
DELIVERIESUNDER
CONST SFQUOTED
RATES# Blds Total RBA Direct SF Total SF Vac %
Austin County Ind 34 1,642,197 586,074 586,074 35.7% (7,258) 0 0 $10.23
ABSORPTIONNet absorption for the overall Houston Industrial market was positive 2,577,450 square feet in the fourth quarter 2018. That compares to positive 2,774,980 square feet in the third quarter 2018, positive 916,332 square feet in the second quar-ter 2018, and positive 3,155,738 square feet in the first quarter 2018.
Tenants moving out of large blocks of space in 2018 include: United stationers moving out of 211,680 square feet at 8518 W Little York Rd and Distribution Now moving out of 100,000 square feet at 359 Old Underwood Rd.
Tenants moving into large blocks of space in 2018 include: Goodman manufacturing moving into 411,422 square feet at 6751 N Eldridge Pky, and Kuraray America moving into 369,755 square feet at 4925 Underwood Rd.
The Flex building market recorded net absorption of nega-tive 74,646 square feet in the fourth quarter 2018, compared to positive 197,013 square feet in the third quarter 2018, negative 181,435 in the second quarter 2018, and positive 64,749 in the first quarter 2018.
The Warehouse building market recorded net absorption of positive 2,652,096 square feet in the fourth quarter 2018 compared to positive 2,577,967 square feet in the third quarter 2018, positive 1,097,767 in the second quarter 2018, and positive 3,090,989 in the first quarter 2018.
VACANCY The Industrial vacancy rate in the Houston market area decreased to 5.5% at the end of the fourth quarter 2018. The vacancy rate was 5.7% at the end of the third quarter 2018, 5.4% at the end of the second quarter 2018, and 5.2% at the end of the first quarter 2018.
Flex projects reported a vacancy rate of 9.4% at the end of the fourth quarter 2018, 9.2% at the end of the third quarter 2018, 9.5% at the end of the second quarter 2018, and 9.0% at the end of the first quarter 2018.
Warehouse projects reported a vacancy rate of 5.1% at the end of the fourth quarter 2018, 5.3% at the end of third quarter 2018, 5.0% at the end of the second quarter 2018, and 4.9% at the end of the first quarter 2018.
RENTAL RATES The average quoted asking rental rate for available Industrial space was $7.46 per square foot per year at the end of the fourth quarter 2018 in the Houston market area. This represented a 1.6% increase in quoted rental rates from the end of the third quarter 2018, when rents were reported at $7.34 per square foot.
The average quoted rate within the Flex sector was $9.89 per square foot at the end of the fourth quarter 2018, while Warehouse rates stood at $7.11. At the end of the third quarter 2018, Flex rates were $9.93 per square foot, and Warehouse rates were $7.00.
ABSORPTION & DELIVERIES
U.S. VACANCY COMPARISON
U.S. RENTAL RATES COMPARISON
U.S. CAP RATE COMPARISON
Source: CoStar Property®
The information and details contained herein have been obtained from third-party sources believed to be reliable; however, DFW Lee & Associates, LLC - Houston Office has not independently verified its accuracy. DFW Lee & Associates, LLC - Houston Office makes no representations, guarantees, or express or implied warranties of any kind regarding the accuracy or completeness of the information and details provided herein, including but not limited to the implied warranty of suitability and fitness for a particular purpose. Interested parties should perform their own due diligence regarding the accuracy of the information. The information provided herein, including any sale or lease terms, is being provided subject to errors, omissions, changes of price or conditions, prior sale or lease, and withdrawal without notice, by third-party data source providers. The Houston Industrial Market Report compiles relevant market data by using a third-party database for the proprietary analysis of specific industrial properties in the Houston Area.