It's Not Quite 2021 Again, But Houston Industrial Product Is ‘Flying Off The Shelves’

After sharply declining from pandemic highs for the past two years, Houston industrial investment sales transactions are picking up the pace.

There have been $1.9B worth of transactions through the third quarter of this year, an 11% increase from the same period last year, according to JLL data. Houston’s perception as a top industrial market plus an uptick in smaller building users, value-add opportunities and owner-user purchases are propping up the activity. 

The entire Southwest region saw its transaction volume rise 20% during the first half of this year, while transaction volumes in the West, Northeast and Mid-Atlantic declined by more than 30%, said Trent Agnew, Houston-based senior managing director and industrial group leader for JLL Capital Markets.

Investors want to put their capital in markets where they expect long-term growth, and Houston fits that standard considering its strong industrial absorption, Agnew said. More than 6M SF of industrial space was absorbed in the third quarter. 

“It’s twofold,” Agnew said of the reasons Houston is seeing industrial transactions pick up. “It’s Houston and Texas rising in the ranks of markets in favor, and then some other markets that historically got a lot of capital falling a little bit out of favor. Houston’s probably the best story from a supply-demand standpoint.” 

Houston’s net absorption through the third quarter of this year is 16.6M SF, while it has 8.8M SF under construction, according to JLL’s report. 

“We're seeing in our absorption numbers almost two [times] what our under-construction pipeline is, which is a pretty unique point in time,” Agnew said.

With interest rates dropping, Agnew said transaction volume will likely continue its upward trend.

“I'm not sure I would predict that we will get back to 2021-type volume any time soon, but I think 2024 and 2025 are both going to be really strong years,” he said. 

Houston saw $5.2B worth of industrial transactions in 2021, according to JLL data, an 81% increase from 2020. That fell by 14% to $4.5B in 2022, then fell by another 48% to $2.3B in 2023. 

But Houston saw industrial activity last quarter that evoked memories of pandemic-frenzied activity when an e-commerce boom enticed retailers and logistics companies to heavily invest in large industrial space.

BroadRange Logistics signed a 1.2M SF lease last month for a speculative project in Conroe, the first 1M SF or bigger lease in Houston since 2022. Also late last month, MDH Partners acquired a 996K SF industrial distribution center leased by Ikea at 4762 and 4830 Borusan Road in Baytown.

Yet these large transactions aren’t the most popular right now.

“True core buyers,” who tend to purchase high quality, newly developed industrial product, haven’t fully returned to the market, Agnew said. It’s definitely easier to exit an investment or sell a new product today than it was a year ago, but there are about two times as many value-add buyers today, he said.

Ali Eskan, partner at Houston-based commercial real estate investment group Seven City, is a value-add buyer who started buying industrial properties in 2019. Originally a retail investor, Eskan sought opportunity in whatever value-add properties he could find, which led him toward smaller industrial buildings. He’s ridden the waves in the market since, he said. 

While 500K SF or larger buildings were very active in 2021, more developers and investors have realized that many tenants need around 100K SF of space, Eskan said.

“This year, I realized that people are getting into those, and they’re starting to build 150K SF, 200K SF. Those types of square footage, they’re flying off the shelves,” Eskan said. “There’s so much demand for it.” 

Most of the existing products of that size are older, meaning the buildings are metal rather than concrete, have lower ceilings and other qualities that are less attractive than the specs at newer buildings, he said. It has become quite lucrative to build and sell in that size range, Eskan said.

Investment is also being buoyed by a sharp increase in owner-users, Agnew said.

“Tenants buying their own buildings, we’ve seen that expand over 100% this year compared to last year,” Agnew said.

It can be more cost-effective for businesses to buy and occupy older, smaller buildings than to lease them, Eskan said. For a 20K SF building, the cost of a mortgage could be cheaper than rent, he said.

“These types of people who want 20K SF of space, they're not like your average Joe … These are businesses,” he said. “So they usually have capital or access to capital so that they can buy.” 

Buying rather than renting allows businesses to “control their own destiny” by not being subject to rent spikes, Agnew said. The sweet spot to buy rather than rent hovers around 100K SF to 200K SF, though JLL has seen some users buy as much as 400K SF. 

A lot of those users come from the West Coast and are happy to invest in Houston, Agnew said, adding tax and depreciation benefits to owners completing sale-leasebacks for their companies is a draw.

That model has increased substantially since 2022. 

But no matter the motivation, for any industrial product in Houston, there is a stronger buyer pool today than there was 12 to 18 months ago. 

“There's definitely a light that's being shined on Houston right now in a positive way that's been great for our business and for the broader market as a whole,” Agnew said.