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Houston’s Industrial Sector Will Recover Faster And Outperform The Rest Of CRE

Houston’s Industrial Sector Will Recover Faster And Outperform The Rest Of CRE

Houston’s industrial sector is expected to outperform all other major sectors of the commercial real estate market this year, as businesses begin to restart after the shutdown.

Industrial recovery will be faster than other sectors, due to rising demand and reliance on third-party logistics companies to help customers with supply chain efficiency, according to Colliers International’s Houston Q1 2020 industrial report.

E-commerce growth and warehouse leasing is expected to accelerate, driven by the need for national stockpiles for public health supplies. Retailers are expected to shift from a “just in time” model to a “just in case” model, which will boost demand for warehouse storage.

With the airline industry in crisis, major port cities will also likely see the benefit of increased traffic.

“As a global port city and a super regional economic powerhouse, Houston stands to benefit from the re-ordering of the global economy,” the report said.

The report cited Duke Realty Corp.’s estimate that an increase in inventory and on-shoring could require as much as 1B SF of industrial product in the U.S.

Demand for more industrial space already began to appear during the first quarter. Houston posted 3.2M SF of positive net absorption during Q1 2020, an increase of 39.1% from Q4 2019.

Houston’s average industrial vacancy rate increased by 100 basis points from the prior quarter, rising from 6.9% in Q4 2019 to 7.9% in Q1 2020. At the end of the first quarter, Houston had 45.6M SF of vacant industrial space for direct lease, and an additional 2.2M SF of vacant space for sublease.

Right now, 17.8M SF of industrial space is under construction in Houston, and 50.4% of that space is pre-leased. The largest project under construction is a 2.17M SF distribution warehouse for Ross Stores in Brookshire.

Houston was approaching an overbuilt bulk industrial market, with multiple industrial projects under construction and recently delivered. The economic impact of the coronavirus pandemic is expected to curtail additional speculative inventory, and allow the demand side to catch up with the supply of available buildings, the report said.