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Houston Industrial Demand Is Dropping Off Faster Than Its Supply Pipeline

Houston industrial leasing activity in the third quarter was down 25% from last year, and while the pace of construction has slowed, vacancy is still on the rise in the cooling market, a new report from Savills shows.

Port Houston's growth has driven industrial space demand in the Houston area. A 725K SF resin packaging facility for Packwell Industries is under construction at the port.

Deliveries were down 10% year-over-year, but with another 23.9M SF under construction, vacancy is expected to keep rising, Savills Research Manager Deandre Prescott said.

“Nationwide, the industrial market has seen a little bit of a slowdown compared to what we've seen in prior quarters,” Prescott said. “Houston's no different. In Houston, we’ve seen positive absorption, but there’s so much supply coming online you’re starting to see vacancies trend upwards.” 

Industrial absorption in the U.S. declined by about 50% year-over-year, giving tenants some relief from years of fierce competition for space, Bisnow previously reported. Absorption dropped similarly in Houston, with 8.4M SF being absorbed in Q3 2022 and 4.5M SF being absorbed in Q3 2023.

This pushed the vacancy rate from 5.7% to 6.4% over the same time period, according to Savills.

Leasing demand and absorption are slowing down from prior years, which was expected after 2021 and 2022's record highs, Prescott said. Leasing has trended down for three consecutive quarters, but more tenants are taking space than giving it up.

Large deals are still happening, though much less frequently than in previous years. The only leases over 400K SF were Distribution Alternatives' deal for 855K SF at 30815 Kingsland Blvd. in the Southwest submarket and Technip FMC's contract for 462K SF at 1777 to 1803 Gears Road in the region's North submarket, according to the report.

The next three largest leases ranged from 167K SF to 224K SF. 

“The larger leases have not been as often as they were a year ago,” Prescott said. “One of the investors’ concerns we’re seeing in the market is some of the large blocks that are coming online. There hasn’t been as many occupiers taking the larger lease spaces.”

Some industrial users have realized they overestimated the space they would need in Houston's market this year, including Wayfair, which abandoned its plans to occupy a 1.2M SF warehouse that is expected to be completed next month. 

As more 500K-plus SF buildings come online, supply will continue to outpace demand, Prescott said. Houston’s industrial building cycle began to cool in the second quarter, and the construction pipeline shrank by 3M SF year-over-year in the third quarter, according to Savills.

But 7.5M SF delivered between July and September, which is only a 10.7% drop from Q3 2022’s 8.4M SF. Annual average asking rents rose from last year, though, from $6.72 per SF to $7.32 per SF, according to the report. The national average was $9.22 per SF.

“There are still strong indicators in Houston,” Prescott said. “We still have competitive rates compared to other parts of the country and we have a strong labor pool. So demand is still positive, just not at the point that we’ve seen over the last year.”

Port Houston remains a driver of Houston's industrial market, and its traffic from August was down 4% from last year. This was mild and expected after 2022’s record highs, Savills researchers wrote. About 50% of deliveries this quarter were in the area around the port, which also has the highest vacancy of all Houston submarkets at 7%, according to Savills.