Houston’s Industrial Building Cycle Is Finally Cooling Off
Houston’s industrial pipeline began to trend downward in the second quarter following a record high under-construction volume in the first quarter. JLL experts say this is a good thing for the market.
“We're going to see that record construction activity that we had in the first quarter really start to come down and help us kind of rebalance the market looking ahead and moving into 2024,” said Rachel Alexander, director of research for JLL in Houston.
Houston had 27.4M SF of industrial space under construction at the end of Q2, down from over 30.5M SF in Q1, according to JLL reports.
At midyear, Houston’s total net absorption of 10.2M SF has already surpassed the pre-2020 annual average as the market continues to perform above historical norms, the report states. Yet absorption is still well below the 15.4M SF in deliveries for the year.
“The supply side will really start to correct itself,” Alexander said.
Houston’s industrial market had a 6.6% vacancy rate at the end of Q2, up from 6% the previous quarter. While the construction pipeline is slowing, much of the new construction is speculative. JLL’s report shows about 20M SF of speculative construction versus 5M SF of build-to-suit. That could lead to another quarter or two of vacancy increases as those products deliver, Alexander said, but that should eventually reverse.
JLL Executive Vice President Mark Nicholas said he has heard from developers that construction is slowing down partially because it has become more challenging to get financing.
The report indicates that there are more than 27M SF of tenants in the market, nearly 25% of which are new-to-market companies. Deals are taking longer, though, Nicholas said.
“We've got several big bombers, meaning 500K SF-plus, and we're trading proposals on both of them. One in Katy and one in Baytown,” he said. “But they're just taking longer to get done.”
The variety of industries looking for space is wide, Nicholas said, naming solar panel companies, battery companies, autonomous cars, tractor-trailers and third-party logistics.
“We’re not just seeing one or two [businesses]. We’re seeing five, six, seven in every category,” he said. “It's just really interesting times right now and fascinating seeing the different types of industries.”
There was 7.8M SF worth of leasing activity in Q2, bringing total absorption to 4.7M SF, according to the report.
Absorption was led by three tenant expansions. Macy’s undertook a 908K SF relocation from an older, urban-infill location off I-45 South to a recently delivered building at Interchange 249. Penske grew its Houston footprint by 603K SF with a move into South Belt Central Business Park, and a parcel delivery service relocated to 440K SF at Park 8Ninety, the report states.
