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Houston's Supercharged Industrial Market Taking Center Stage

While other sectors in Houston have been sputtering along during the recent oil downturn, its industrial market has stayed strong. With plenty of work to be done post-Harvey and little damage to speak of, Houston's industrial sector has reached top gear. 

National Sales Commonwealth Land Title Vice President William Wagasy, Duke Realty Senior Vice President David Hudson, Trammel Crow Company Principal Jeremy Garner
National Sales Commonwealth Land Title Vice President William Wagasy, Duke Realty Senior Vice President David Hudson, Trammell Crow principal Jeremy Garner

"It's sad to say, but Harvey really supercharged our absorptions," Duke Realty Senior Vice President David Hudson told the crowd at Bisnow's Hurricane Harvey Construction & Development summit Thursday. "It probably will stay that way for a couple years." 

Houston's industrial sector hit a pause at midyear, but Harvey helped it return to form. Total vacancy once again dipped below the 5% mark, falling 20 basis points to 4.9%. Availability followed suit, reaching 8.9% in the third quarter. Net absorption rebounded to 3M SF, well above the historical average, reports JLL. 

Net occupier demand increased quarter-over-quarter to 2.5M SF. The North and Southeast submarkets saw the heaviest activity, each clocking over 1M SF of net absorption.

The construction pipeline, which fell for the sixth consecutive quarter, is not bringing any relief on the supply side to tenants in the firmly landlord-favorable market.

"As much as it hurts to say this, Harvey was a net positive for the industrial market," Trammell Crow principal Jeremy Garner said. "Almost half the absorption year-to-date has been in the third quarter. It's easy to point to the specific deals." 

Houston's Supercharged Industrial Market Taking Center Stage

An almost 300K SF lease inked by Home Depot was one of several expansion deals signed in the wake of Hurricane Harvey. Lowe's signed a similar lease. Garner pointed out that these deals are not just quick hits, they are three-year deals. 

"Harvey was a game-changer for guys on the fence," Hudson said. 

When Harvey came, those with deals in the pipeline signed their deals before the rush of activity. 

Garner was working one such deal while the flooding was still ongoing. The Tuesday after the storm, he was in his waders, standing in waist-deep water, on the phone with a local bank negotiating a loan extension.

Duke Realty Senior Vice President David Hudson and Trammel Crow Company Principal Jeremy Garner
Duke Realty Senior Vice President David Hudson and Trammell Crow principal Jeremy Garner

"We've seen a flurry of activity in almost all the submarkets," Garner said. 

With the state of the current market, both Hudson and Garner expect to see a lot of spec activity in the next 12 months. Trammel Crow's Fallbrook Pines Business Park is working on adding 660K SF. The northwest and southeast submarkets will capture the majority of the activity. 

If there is one challenging area, it is the southwest submarket. 

"The southwest market is the most perplexing area," Hudson said. High deal velocity and plenty of new spec construction are fueling competition, leading to concessions. "I think we're seeing a caution flag to slow down," he said.

But given the uptick in user requirements, Houston's overall industrial vacancy is expected to tighten through the end of the year and into the first half of 2018.

"We are seeing a healthy sector get even healthier," Garner said.