2023 Q3 - Houston Industrial Sector Overview!

[Bill Rapp]

Houston has consistently ranked as one of the top industrial markets in the nation over the past three years. In 2020, Houston delivered 30 million square feet of industrial space, followed by 23 million square feet in 2021, and 24 million square feet in 2022. These levels of construction are significantly higher than Houston's historical average of 12 to 13 million square feet per year. Despite the increased supply, vacancy rates remained relatively unaffected due to strong net absorption, with over 30 million square feet in 2020, over 33 million square feet in 2021 (the highest on record), and 29 million square feet in 2022. As a result, market rents increased by 4% to 6% annually in 2021 and 2022, and the overall market vacancy rate decreased to 5%.

Texas continues to experience robust residential growth, particularly in the Houston and Dallas metros. According to the U.S. Census Bureau, Texas had the largest numeric gain in population in 2021, with an increase of 310,288 residents. To put this in perspective, the entire United States population only grew by 392,655 during the same period. The growth in the e-commerce sector, strong demand for construction materials, and the resurgence of the petrochemical industry have all contributed to Houston's industrial growth. With its large and busy ports, Houston serves as a major distribution hub for Texas and the Midwest. However, the current economic climate indicates that Houston is now entering the later stage of the growth cycle.

Based on the number of projects currently under development, it is expected that supply will continue to outpace demand until the end of the year. Consequently, the vacancy rate could potentially reach 7% in 2024. The increase in vacant supply, coupled with declining consumer demand and limited new leasing activity, has contributed to the rise in the overall vacancy rate. However, despite the increase, the vacancy rate remains below the 10-year average of 5.1% and is 10 basis points lower than the first quarter of 2020.

Due to the current economic conditions, developers are cautious about committing to speculative projects, which may result in slower construction starts in the next two to three quarters. While we have enjoyed a high level of demand in recent years, we can anticipate a more balanced market in the near future, with some regions potentially experiencing supply constraints as demand regains momentum.