Q2 2022 Industrial Real Estate Report: Houston, TX
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
The industrial real estate market in Houston, TX experienced a 13.5% increase in overall rents year-over-year, largely driven by the movement of energy exploration companies into this part of Texas due to its proximity to the Gulf of Mexico and access to both offshore and onshore drilling platforms.
Significant expansion of Houston’s industrial real estate sector has continued for several quarters and is not expected to slow down.
Rents are expected to rise throughout the rest of 2022 as demand and construction costs increase alongside leasing activity, which soared to nearly 42 million square feet in Q2.
The commercial real estate market in Houston remains one of the strongest in the country.
General Area Overview & Demographics
Houston, TX is the most populous city in Texas and the fourth most populous city in the United States, with an estimated metro-area population of 6.6 million in 2022.
The city covers more than 600 square miles and is the country’s fifth largest city by land area.
Houston is a racially and ethnically diverse city, with White, Black, Hispanic/Latino, Asian, and Native American residents making up 47%, 24%, 19%, 6%, and 3% of the population respectively.
The median age in Houston is about 32 years old. Unemployment in Houston is 4.3% as of August 2022.
How much did warehouse space cost in Houston in Q2 2022?
The average cost per square foot to rent warehouse space in Houston in Q2 2022 was about $8.25, breaking Q1’s record of just about $8 per square foot.
The average cost to purchase warehouse space in Houston in Q2 2022 was about $108, up from Q1 2022’s average of about $100 flat.
While most investors and developers may agree that 2022 is a time of economic uncertainty in Houston, the appetite for investment and development has yet to slow down among rising interest rates and runaway inflation.
The gap, however, between buyer and seller expectations is expected to widen throughout the rest of 2022.
Vacancy & Occupancy Rates
Industrial vacancy rates in Houston have continued a steady downward plunge since Q2 2021, on the heels of the pandemic and as businesses began to re-assess and re-strategize their supply chain and logistics operations.
The Q2 2022 industrial vacancy rate in Houston currently sits at about 5.7%, down from 8.5% year-over-year and down from Q1’s average of about 6%.
Leasing velocity in Houston in Q2 2022 was record-breaking, clearing 10 million square feet and encouraging fresh industrial development in the area: about 65 million square feet of new industrial projects have been proposed or are currently undergoing final planning.
Houston’s Industrial Real Estate Net Absorption in Q2 2022
Houston’s net absorption in Q2 2022 was another significant indicator of robust market activity: nearly 6.5 million square feet of positive net absorption as more businesses plant logistics footholds in Houston.
The Pacing of Industrial Rents in Houston, TX
Annual increases in Houston’s industrial rental rates have historically sat at around 2%, but recent years have changed that.
Now, average annual rate increases for industrial rents in Houston now average about 3.5% to 4%.
This is largely due to owners increasing rental rates to battle inflation and keep their properties operational, but other factors like the Fed’s increasing of interest rates may maintain this new average annual increase for many quarters to come.
Year-Over-Year Industrial Rent Activity in Houston
Industrial rents in Houston haven’t significantly declined since their Q2 2018 average of about $6.75 per square foot.
- Rents for Houston industrial property increased between Q2 2018 and Q2 2019 by about 6%.
- Rents for Houston industrial property increased between Q2 2019 and Q2 2020 by about 3.5%.
- Rents for Houston industrial property stayed about the same between Q2 2020 and Q2 2021.
Currently, the delivery of finished industrial projects in Houston is not expected to keep up with rising rents as most tenants will not be able to occupy pre-leased spaces until 2023.
As a result, rents may continue to increase throughout the rest of 2022 as prospective tenants compete for the market’s currently available space.
Industrial Leasing Activity in Houston in Q2 2022
Some notable industrial leasing activity in Houston in Q2 2022 included:
- Walmart’s leasing of about 195,000 square feet at the Kennedy Greens Distribution Center.
- Pepsi’s leasing of about 150,000 square feet at the CityPark Logistics Center.
- Meiborg’s leasing of nearly 400,000 square feet at Fairway North Logistics Park Building.
These are some among many notable industrial leases that were signed in Houston in Q2 2022.
Completed Industrial Projects in Houston in Q2 2022
Nearly 1.7 million square feet of new industrial projects were completed in Houston in Q2 2022, but nearly 500,000 of that remains un-leased.
Among the named completed projects are the American Furniture Warehouse, the Mesa East Industrial Park, and the 290 Eight Distribution Center.
Takeaways for Houston, TX Industrial Real Estate Investors
Investors and developers are stepping back to re-assess the industrial landscape and future of Houston, TX among rising interest rates and runaway inflation.
The significantly aggressive stance the Federal Reserve has taken on interest rate hikes (which resulted in a 1000-point DOW slide on Friday, August 27th, 2022) will absolutely affect the pace at which new industrial projects are planned and completed as the costs of materials, labor, and money rise.
Regardless, the market may equalize in late 2023 as more industrial projects are finished and delivered, increasing vacancy rates and lowering rents.
Do your research, stay diligent, and happy investing.
Methodology
All figures presented in this article are based on MyEListing.com’s commercial real estate listing data in corroboration with other freely available data and information covering the commercial real estate industry.
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