Research &

Forecast Report

HOUSTON | INDUSTRIAL
Q3 2020

Houston’s industrial market continues to expand amid

economic and political uncertainty
Lisa Bridges Director of Market Research | Houston

Commentary by Ryan Byrd and Patrick Duffy

Third-quarter economic activity recovered in the U.S. after a Market Indicators Annual Quarterly Quarterly
Relative to prior period Change Change Forecast*
precipitous drop in Q2 as COVID lockdowns in most of the country
were eased. The energy sector, a major contributor to the industrial VACANCY
industry in Houston, continued to struggle as rig counts dropped to
NET ABSORPTION
a historically low level of approximately 270 active rigs in the U.S.,
down 570 from the same time last year and down by over 1,600 DELIVERIES
from the peak in 2014. Oil and gas prices have been trading in a UNDER CONSTRUCTION
range that will not spur new drilling of any significant amount in the
near term. Oil field services firms, a significant component of our *Projected
local industrial economy, have been hit very hard.

The Houston industrial market plodded through the 3rd quarter with
a lower than average absorption number of 1.3 million square feet,
but despite continued COVID slowdowns, leasing activity remained
steady. At almost 6 million square feet of leases executed, Houston Summary Statistics
Houston Industrial Market Q3 2019 Q2 2020 3Q 2020
remained on par with the previous two quarters. General market
uncertainty caused many tenants (who had the option) to delay Vacancy Rate 6.6% 8.1% 8.5%
real estate decisions and created a dampening of activity. We
believe that underlying demand is more robust than the absorption Net Absorption (SF) 1.7M 3.8M 1.2M
numbers suggest. The lockdowns have accelerated the growth of
e-commerce globally, a significant driver of industrial (distribution) Deliveries (SF) 4.6M 6.7M 4.5M
demand. Amazon remains the most significant player locally at
almost half of the quarter’s absorption. Local tenants in the 40- Under Construction (SF) 19.2M 16.9M 15.2M
60,000 square foot range remained the most active tenant group,
especially in the Northwest and Southwest submarkets. Downward
pressure on rents increased over the quarter, with the North Asking Rents
Houston Industrial Market Q3 2019 Q2 2020 Q3 2020
submarket pressed to give the most concessions.
Average $7.43 $7.83 $8.07
At the beginning of the year, we were concerned that supply was Warehouse/Distribution $6.97 $7.22 $7.46
outpacing demand; however, Covid and low oil prices led to the
delay of several proposed projects. The trend toward a “flight to Flex/Service $8.92 $10.14 $10.36
quality” continued to benefit several new deliveries encouraging Tech/R&D $10.85 $15.29 $14.77
a handful of developers who had paused to restart speculative
building. There are approximately 16 million square feet of Big Box $5.03 $6.05 $6.06
institutional-grade projects under construction, and almost 8 million
SF delivered in Q3. We continue to see developers build larger
buildings as Houston moves to more of a big-box market. Of the

Share or view online at colliers.com/houston

Commentary - continued UNEMPLOYMENT 8/19 8/20

HOUSTON 4.1% 8.1%

24 million combined square feet under construction and deliveries,
almost half is found in fifteen buildings that are 400,000 square TEXAS 3.7% 7.0%
feet or larger.
U.S. 3.8% 13.9%
Along with E-Commerce growth, freezer/cooler requirements
Annual # of Jobs
have increased dramatically in the third quarter. More people JOB GROWTH Change Added
working from home and the economic slowdown have created an
HOUSTON -5.8% -182.8K
increase in home food consumption. Further, this trend is occurring
nationwide, which will spur enhanced activity within Port Houston. TEXAS -4.9% -628.8K

The superior performance during COVID and long-term trends for U.S. -6.9% -10.4M
industrial CRE have significantly increased investor demand both
in rotation from other CRE asset types and as new funds enter Sales Activity
the market in search of yield. Limited availability and increased Source: Real Capital Analytics Q3 2020
demand have caused middle-market asset CAP rates to compress.
NO. OF PROPERTIES: 29
We expect this trend to continue well into 2021 as interest rates
remain low and the economy continues to recover from the SALES VOLUME: $165M
shutdowns.
AVERAGE $/SF: $78
In the past few weeks, Houston’s industrial market has seen AVERAGE CAP RATE: 6.9%
an uptick in leasing activity and new tenant requirements as
employees have started getting back to the workplace, and students
have gone back to school. As Houston begins to see a pickup in Buyer Composition
activity, the industrial market unfortunately still appears caught 1.4% 2.0%
10.6%
9.1%
16.1%
4.4% 5.6%

between what we hope to be the tail end of Covid and the 2020
9.0%
24.9%
8.9%
38.7% ` 23.5% 33.1%
elections’ uncertainty. The elections will impact the oil and gas 24.4%

industry as the two parties have significantly different approaches 26.7%

20.5%
7.0%
58.3%

to the fossil fuel sector. Hopefully, with the elections behind us 14.8%
19.3%
69.4%
and a potential vaccine roll-out in Q4, we will see the exceptional 14.5%

uncertainty in the market calm, allowing companies to make more 38.8% 39.9%
33.4%
53.7%

27.7%
informed long-term real estate decisions. 22.6%

6.3% 6.3% 9.1% 6.9% 6.7%

1.8% 4.5%
2014 2015 2016 2017 2018 2019 2020 YTD

Cross-Border Institutional REIT/Listed Private User/Other

Average Price Per SF

U.S. Houston
$105
$100
$95
$90
$85
$80
$75
$70
$65
$60

Average CAP Rate

U.S. Houston

9.0%

8.5%

8.0%

7.5%

7.0%

6.5%

6.0%

5.5%

5.0%

2 Houston Research & Forecast Report | Q3 2020 | Industrial | Colliers International

Vacancy & Availability
On an annual basis, Houston’s average industrial vacancy rate
increased 40 basis points from 8.1% in Q2 2020 to 8.5% in Q3
2020 and by 190 basis points annually from 6.6% in Q3 2019. The
increase in vacancy is due to the addition of 191 new buildings
added to inventory since the beginning of 2020. Only 45% of the
29.3M SF of new inventory has been leased since delivered.

At the end of the third quarter, Houston had 51.6M SF of vacant

industrial space for direct lease and an additional 1.7M SF of vacant
sublease space. Among the major industrial corridors, the Inner
Loop Corridor, Liberty County and the South Corridor have the
lowest vacancy rates of 5.7%, 0.8% and 5.1%, respectively. The
submarket with the largest percentage of vacant space is the North
Corridor, which has a 10.0% vacancy rate.

Absorption & Demand

Houston’s industrial market posted 1.2M SF of positive net
absorption in the Q3 2020, a decrease of 68.4% over the quarter.
Some of the tenants that contributed to absorption by relocating or
expanding in Q3 2020 include Amazon moving into 443,500 SF
in the Northwest Corridor and also into 200,400 SF in the South
Corridor, American Furniture Warehouse moving into it’s 498,700
SF warehouse in the Northwest Corridor and Goodman Air
Conditioning and Heating moving into 312,640 SF in the Northwest
Corridor.

The majority of Q3 2020 positive net absorption occurred in the

North Corridor, recording 1.5M SF. All of the major industrial
corridors recorded positive net absorption in Q3, with the exception
of the Inner Loop, Southeast and Southwest Corridors.

Rental Rates
According to our data service provider (CoStar Property), Houston’s
citywide average quoted industrial rental rate for all product
types increased from $7.83 per SF NNN to $8.07 per SF NNN
over the quarter. According to Colliers’ internal data, actual lease
transactions are in the $4.56 – $5.16 per SF NNN range for newer
bulk industrial spaces. In contrast, flex rates range from $7.20 to
$10.80 per SF NNN depending on the existing improvements or
the allowance provided for tenant improvements and the age and
location of the property.

Based on data from our data service provider, the average quoted
NNN rental rates by property type are as follows: $7.46 per SF
for Warehouse Distribution space, $10.36 per SF for Flex/Service
space, Tech/R&D space averaging $14.77 per SF and $6.06 per SF
for Big Box.

3 Houston Research & Forecast Report | Q3 2020 | Industrial | Colliers International

Leasing Activity
According to our data service provider (CoStar Property), Houston’s industrial leasing activity increased over the quarter from 5.4M SF
in Q2 2020 to 5.9M SF in Q3 2020. The majority of third quarter transactions consisted of leases for 50,000 SF or less; however, there
were several larger deals that occurred. The table below highlights some of the larger transactions that closed in Q3 2020.

Q3 2020 Industrial Lease Transactions over 75,000 SF

BUILDING NAME/ADDRESS SUBMARKET SF TENANT LEASE DATE

Underwood Port Logistics Center East-Southeast Far 400,000 Pioneer 1

Sep-20
8833 Citypark Loop Northeast Hwy 90 254,160 DHL 3
Sep-20
Monument Business Park - Bldg B East-Southeast Far 252,203 Slay Industries1 Sep-20
560 E Richey Rd North Hardy Toll Rd 156,505 MiTek 1
Aug-20
Beltway Crossing Business Park - Bldg 2 Hwy 59/Hwy 90 141,440 Lawless Group 1
Aug-20
Thompson 10 Logistics Center - Bldg 1 East-Southeast Far 130,074 SLM 1
Sep-20
1031 Bammel Rd - Bldg G North Hardy Toll Rd 125,000 Beacon Roofing Supply, Inc.3 Aug-20
Bayou Bend Business Park - Bldg 1 Southwest Far 107,390 Niagra3 Aug-20
Carson 249 Northwest 104,622 ONUS Global Fulfullment 1
Sep-20
Bayport North Logistics Center I East-Southeast Far 102,863 Frederick Trucking1 Aug-20
Parc 59 - Bldg A Northeast Hwy 90 82,800 Kalera1 Jul-20
15500 Vickery Dr - Bldg 8 North Hardy Toll Rd 75,200 Legacy Paper 2,4
Aug-20
Direct/New
1
Colliers International Transaction
2 3
Renewal or Expansion Sublet
4

Under Construction
15.2M SF of industrial space is under construction in Houston, with 38% of this space pre-leased. The largest project under construction
is a 2,165,000-SF distribution warehouse for Ross Stores Inc., located in Brookshire, TX. The majority of projects under construction
are located in the Southwest, North and Southeast Corridor submarkets. Below is a partial list of the largest buildings currently under
construction.

Q3 2020 Industrial Under Construction - 300,000 SF or greater

% LEASED/ DELIVERY
BUSINESS PARK/ADDRESS SUBMARKET RBA DEVELOPER/CONTRACTOR BUILDING DESCRIPTION
OWNED DATE

31207 Kingsland Blvd Sugar Land/Brookshire 2,165,000 100% Ross Stores Inc Feb-21 Ross Distribution Center
Cedar Port Trade Center East-Southeast Far 1,021,440 0% Hunt Southwest Real Estate Mar-21 Spec Distribution
Amazon - 10507 Harlem Rd Sugar Land 850,000 100% Trammell Crow Company Aug-21 BTS Distribution
Empire West 3 Northwest Outlier 750,775 0% Stream Realty Mar-21 Spec Distribution
The Uplands Twinwood DC 1 Sugar Land 737,630 0% Clay Development & Sep-21 Spec Distribution
Construction
Generation Park Northeast Hwy 90 648,720 0% Lincoln Property Company May-21 Spec Distribution
1919 S Fm 565 Rd East-Southeast Far 604,800 100% DVO Oct-20 BTS Katoen Natie
Boulevard Oaks Business Park Southwest Far 534,440 0% Hines Dec-20 Spec Distribution
- Bldg 8
625 Independence Pky - Bldg B East-Southeast Far 414,900 60.8% Molto Properties Oct-20 Spec Distribution
Ella Logistics Center North Fwy/Tomball Pky 358,567 0% Hines Dec-20 Spec Distribution
Rankin 45 Distribution Center North Hardy Toll Road 356,236 0% Trammel Crow Company Oct-20 Spec Warehouse
Sugar Land Crossroads Sugar Land 326,792 0% Transwestern Jan-21 Spec Warehouse
15130 Market St Rd - Bldg 1 East I-10 Outer Loop 316,172 0% National Property Holdings LP Dec-20 Spec Distribution

4 Houston Research & Forecast Report | Q3 2020 | Industrial | Colliers International

Market Summary

Q3 2020 Houston Industrial Market Statistical Summary

DIRECT SUBLET TOTAL
RENTABLE DIRECT VACANCY SUBLET VACANCY TOTAL VACANCY NET SF UNDER
MARKET AREA VACANT SF RATE VACANT SF RATE VACANT SF RATE ABSORPTION DELIVERIES CONSTRUCTION
Houston Total 624,338,354 51,589,395 8.3% 1,662,010 0.3% 53,251,405 8.5% 1,213,104 4,478,575 15,180,269

CBD-NW Inner Loop 11,222,445 695,258 6.2% 1,950 0.0% 697,208 6.2% 143,225 - -
Downtown 30,686,821 1,388,794 4.5% 88,000 0.3% 1,476,794 4.8% (229,512) - -
North Inner Loop 5,170,784 180,859 3.5% - 0.0% 180,859 3.5% (36,226) - -
Southwest Inner Loop 5,660,747 637,091 11.3% - 0.0% 637,091 11.3% (94,852) - -
INNER LOOP 52,740,797 2,902,002 5.5% 89,950 0.2% 2,991,952 5.7% (217,365) - -
CORRIDOR TOTAL

Liberty County 1,753,942 13,600 0.8% - 0.0% 13,600 0.8% 62,800 - -

LIBERTY COUNTY 1,753,942 13,600 0.8% - 0.0% 13,600 0.8% 62,800 - -
TOTAL

North Fwy/Tomball Pky 31,192,438 3,946,691 12.7% 196,768 0.6% 4,143,459 13.3% 289,864 398,577 660,060
North Hardy Toll Rd 39,376,173 3,823,040 9.7% 61,730 0.2% 3,884,770 9.9% (70,193) 90,750 835,346
North Outer Loop 23,443,201 1,924,272 8.2% 12,000 0.1% 1,936,272 8.3% 2,222 - 615,585
The Woodlands/Conroe 21,792,796 1,533,278 7.0% 34,032 0.2% 1,567,310 7.2% (106,098) 21,000 169,210
NORTH CORRIDOR 115,804,608 11,227,281 9.7% 304,530 0.3% 11,531,811 10.0% 115,795 510,327 2,280,201
TOTAL

Northeast Hwy 321 1,559,603 21,200 1.4% - 0.0% 21,200 1.4% - - -

Northeast Hwy 90 21,276,110 1,822,958 8.6% 60,195 0.3% 1,883,153 8.9% 160,780 279,500 648,720
Northeast I-10 4,114,787 41,200 1.0% 25,728 0.6% 66,928 1.6% (40,157) - -
Northeast Inner Loop 12,096,334 548,046 4.5% 10,530 0.1% 558,576 4.6% (83,670) - -
NORTHEAST 39,046,834 2,433,404 6.2% 96,453 0.2% 2,529,857 6.5% 36,953 279,500 648,720
CORRIDOR TOTAL

Hwy 290/Tomball Pky 27,903,268 4,124,046 14.8% 239,167 0.9% 4,363,213 15.6% 295,046 622,720 -
Northwest Hwy 6 12,697,509 782,575 6.2% - 0.0% 782,575 6.2% 622,778 32,050 133,750
Northwest Inner Loop 60,279,036 4,434,141 7.4% 251,753 0.4% 4,685,894 7.8% 40,791 22,166 -
Northwest Near 18,300,865 828,608 4.5% 68,348 0.4% 896,956 4.9% (117,351) - -
Northwest Outliers 30,672,658 3,109,589 10.1% 3,838 0.0% 3,113,427 10.2% 581,641 839,048 1,599,049
West Outer Loop 27,362,993 1,550,438 5.7% 64,976 0.2% 1,615,414 5.9% 121,469 - 36,875
NORTHWEST 177,216,329 14,829,397 8.4% 628,082 0.4% 15,457,479 8.7% 1,544,374 1,515,984 1,769,674
CORRIDOR TOTAL

South Highway 35 36,060,720 1,139,340 3.2% 202,108 0.6% 1,341,448 3.7% 453,326 272,764 661,016
South Inner Loop 11,826,476 1,022,450 8.6% 75,155 0.6% 1,097,605 9.3% (177,330) - -
SOUTH CORRIDOR 47,887,196 2,161,790 4.5% 277,263 0.6% 2,439,053 5.1% 275,996 272,764 661,016
TOTAL

East I-10 Outer Loop 13,699,351 296,380 2.2% - 0.0% 296,380 2.2% 500 - 395,725
East-Southeast Far 78,942,686 8,405,346 10.6% 230,100 0.3% 8,635,446 10.9% (420,428) 271,924 3,787,072
Southeast Outer Loop 17,413,183 1,779,830 10.2% - 0.0% 1,779,830 10.2% (79,844) - -
SOUTHEAST 110,055,220 10,481,556 9.5% 230,100 0.2% 10,711,656 9.7% (499,772) 271,924 4,182,797
CORRIDOR TOTAL

Highway 59/Highway 25,377,975 2,666,744 10.5% 7,600 0.0% 2,674,344 10.5% (58,733) 454,016 596,475
90
Southwest Far 18,050,794 2,812,446 15.6% - 0.0% 2,812,446 15.6% (35,079) 1,148,460 153,430
Southwest Outer Loop 13,185,863 1,066,678 8.1% 26,032 0.2% 1,092,710 8.3% (22,061) - -
Sugar Land/Ft Bend Co 23,218,796 994,497 4.3% 2,000 0.0% 996,497 4.3% 10,196 25,600 4,887,956
SOUTHWEST 79,833,428 7,540,365 9.4% 35,632 0.0% 7,575,997 9.5% (105,677) 1,628,076 5,637,861
CORRIDOR TOTAL

5 Houston Research & Forecast Report | Q3 2020 | Industrial | Colliers International

 Q3 Houston Industrial 2020 Highlights
TOTAL INDUSTRIAL
INVENTORY 624.3M SF UNDER
CONSTRUCTION 15.2M SF
DISTRIBUTION: 18%
MANUFACTURING: 15%
R&D: 1%
SERVICE/FLEX 2%
WAREHOUSE: 61%
OTHER: 3%

8.5% $8.07/SF
Q3 2020

NEW CONSTRUCTION
(DELIVERIES)
VACANCY AVG. RENTAL RATE

-2.2%
ANNUAL
Q3 2020 4.5M SF LEASING Q3 2020 5.9M SF
DECREASE Q2 2020 6.7M SF ACTIVITY Q2 2020 5.4M SF
Q1 2020 10.2M SF Q1 2020 8.0M SF
-33.7%
Q4 2019 3.7M SF ANNUAL
Q4 2019 7.0M SF
Q3 2019 4.6M SF DECREASE Q3 2019 8.9M SF

FOR MORE INFORMATION

Lisa Bridges CPRC Ryan Byrd Patrick Duffy MCR
Director of Market Research | Houston Vice President | Houston President | Houston
+1 713 830 2125 +1 713 830 2171 +1 713 830 2112
[email protected] [email protected] [email protected]

Colliers International | Houston

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7 Houston Research & Forecast Report | Q3 2020 | Industrial | Colliers International