July 12, 2020

Fahad Al Tamimi Implies: Houston’s industrial sector girds for a…

Houston’s industrial sector girds for a...

The Houston industrial market had some strong fundamentals during the first quarter, and others that were cause for concern. Since then, of course, there has really only been one concern—COVID-19. Will the pandemic drag down what had been a well-performing sector in a growing market?

One major issue facing Houston’s economy—equally as important as COVID-19 itself—is the effect that the pandemic is having on oil prices. Stay-at-home orders around the country have decimated the need for oil, which will surely affect the energy-dependent Houston economy.

Texas’ year-over-year crude oil production dropped in March, according to data from the Railroad Commission of Texas, from 128 million barrels in 2019 to 107 million barrels this year. However, early resistance from Saudi Arabia and Russia to cut production softened demand. Russia has also indicated that it will ramp up production in June.

New data from Colliers International suggests that global land-based storage will top off in June and oil prices likely won’t rebound for at least 18 to 24 months. Energy firms, as well as the companies that support them, will look to cut costs in the next year with many filing for bankruptcy protection in the near term.

The retail, office and, to a lesser extent, multifamily sectors have and will continue to suffer because of the pandemic. Industrial CRE is an outlier, expected to perform well during the crisis. E-commerce is the only way to access some items, bringing some late adopters on board and accelerating what had already been a dominant trend.

As a result, third-party logistics facilities will likely grow in demand over the next year. Additionally, the logistics supply chain has become an integral part of delivering life-saving equipment in the fight against COVID-19, which only heightens the demand for these spaces.

As COVID-19 has hobbled the airline industry, there will be reverberations felt in the air cargo sector. This will negatively influence many secondary and tertiary markets, which could in fact be a boon to larger markets. Houston’s importance as a port city and as an epicenter of the regional economy means that more air cargo may shift toward the Houston metro.

Many experts believe that manufacturing jobs, which have migrated to sites in China over the past few decades, will begin to return to U.S. soil. This re-shoring would be due in part to corporate distrust of China, and to shorten the manufacturer-to-consumer supply chain. If this plays out as many hope, it could mean an additional 1 billion square feet of industrial real estate need—though it’s unclear how big of a slice the Houston area would get from that pie.

Before the pandemic, Houston’s industrial stock was close to overbuilt. Developers delivered 2.6 million square feet of industrial space in the first quarter, on top of the 3.6 million square feet that came to market in Q4 2019, according to Colliers data. There are currently an additional 13.7 million square feet of space under construction.

The largest of these are fully pre-leased or owner-occupied build-to-suits, such as the 2,165,000-square-foot facility that Ross Stores is building in Sugar Land. There are plenty of spec projects still in the pipeline, however. Stream Realty is erecting a 784,000-square-foot facility in Bay Area Business Park and Avera Companies is developing 644,000 square feet in Cedar Port Logistics. Both were seeking tenants at the time of the Colliers report.

The economic disruption brought about by the COVID-19 pandemic will likely halt any more spec inventory from entering the development pipeline for some time. This may actually allow the demand-supply scales to realign and aid with absorption of all this space.

Despite the new supply, the situation is not actually that dire. The Colliers report—comprising mostly pre-COVID-19 data—showed 3.2 million square feet of positive net absorption across the Houston industrial market. This 39.1 percent quarter-to-quarter increase was aided by relocations such as Home Depot’s move into 770,640 square feet in the Hwy 290/Tomball Parkway Corridor, as well as Sunbelt, which took 191,175 square feet in the North Inner Loop Corridor.

Year-over-year, the vacancy rate for industrial product in the Houston metro rose from 6.1 percent in Q1 2019 to 7.9 percent in Q1 2020—an increase of 180 basis points. The South Corridor was the tightest with a 5.0 vacancy rate in the first quarter, followed closely by the Inner Loop Corridor with 5.1 percent. No submarket had double-digit vacancy last quarter, with the highest being 9.5 percent in the North Corridor.

Overall, however, industrial leasing velocity slowed from the prior quarter—dropping from 6.7 million square feet in Q4 2019 to 5.5 million square feet in Q1 2020. Though there were several notable large leases like Amazon’s mega deal in the Hwy 290/Tomball Parkway Corridor, most activity involved leases for 50,000 square feet or less. As the lead time for most leases is four to six months, the true impact of the pandemic won’t begin to be felt until late into the second quarter.

Fahad Al Tamimi

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