executive summary
Houston's industrial real estate market continues to be one of the strongest performing product types in the city, despite continued signs of an economic slowdown well into the new year, as we've seen healthy leasing activity and positive absorption as the economy slows and developers scale back construction levels in response to fundamental conditions in the market.
After two record-breaking years, a declining construction pipeline could help the market return to sustainable levels. The current pipeline stands at 15.6 million square feet, down 20.8% from the previous quarter and 56.6% from a year ago. The limited supply of both newly completed product and projects under construction could help stabilize the overall market.
Economic Trends
Local population growth continues, making Houston the second-most populous metropolitan area in the United States, with an expected addition of 140,000 residents in 2023. Job growth has also been steady, with a recent revision indicating Houston will add 102,900 jobs in 2023, exceeding previous projections.
The Greater Houston Partnership reported 139 new business announcements in the first quarter, with about 60% of those involving manufacturing companies, distribution and warehousing facilities, and research and development.
The Port of Houston remains a major economic driver for the industrial market, with container volume through February up 12% from the same period last year to 708,926 TEUs (twenty-foot equivalent units). February was notable as the largest month on record for container exports, up 20%, while loaded imports also increased 18%.
Project 11 is progressing well with final dredging contracts awarded and is on track to complete the first segment of the multi-year widening project to deepen and widen the Houston Ship Channel by late 2026.
Supply and demand
New supply of 6 million square feet has also declined over the past two quarters but has consistently outpaced net absorption, which now stands at 2.4 million square feet, down 41.6% from the previous quarter. Leasing activity of 8.2 million square feet is healthy but down from the 2023 quarterly leasing average of 11.7 million square feet.
Activity during the quarter was driven by Dunavant Distribution's 784,000-square-foot renewal in Building 10 at the Southeast Bay Area Business Park and Solar Plus' new lease of 567,140 square feet at Nexus North Logistics Park in the North.
Key occupancies with the largest positive absorption during the quarter included Distribution Alternatives' 855,610 square feet at Kingsland Ranch Logistics Park in the Southwest and Imperial Dade's 293,715 square feet at Lone Star Logistics Park in the South.
With the Port of Houston’s continued expansion, the Southeast Corridor leads other corridors with 28.0% of square footage under construction and 27.9% of total deliveries so far this year.
In terms of net absorption, the Southeast ranked second behind the Southwest. The Southeast was the only sector where absorption exceeded delivery, with absorption exceeding deliveries of approximately 1.5 million square feet and 1.4 million square feet of new product.
Houston's overall vacancy rate increased 40 basis points to 7.4%, with a 61.8% vacancy rate for new listings contributing to the increase. Rents have remained stable over the past two quarters but are up 8.7% year-over-year.
The Houston industrial market will continue to benefit from continued population and job growth in the region, along with the expanding economic growth of the Port of Houston. As the spec development pipeline tightens, vacancy rates should begin to trend downwards later this year.