TEXAS SNAPSHOT, DECEMBER 2006

Houston Industrial Market

Palmer

This is the best market in more than 25 years, according to Micheal Palmer, senior vice president with CB Richard Ellis in Houston. “Transaction size has grown in terms of value and square footage during the past few years in Houston’s industrial market,” he says. “The historical 25,000- to 50,000-square-foot transaction has increased to 65,000- to 100,000-square-feet, particularly in the active submarkets of the Northwest and East Loop/Bayport areas. Strong user demand will continue to support occupancy in the 95 percent range, affirming  increasing rental structures and offsetting increases in operating expenses (insurance and taxes) and new construction costs.”

There are fewer and fewer quality, free-standing buildings on the market for purchase, according to Palmer, and those that come to market sell at premium pricing. “Land sites for industrial product inside the Loop are extremely rare and are priced for special purpose use,” he says.  “There is a shortage, other than 1- to 5-acre sites, inside of Beltway 8 in the northwest quadrant, and prices are rising across the board. It’s a wonderful time to be a broker in Houston.”

Several significant industrial developments are coming on line in the Houston area, and the opening of the Bayport Shipping Terminal is the most important in the coming 6 months, according to Palmer. The free market is on full display among the existing and under construction distribution facilities supporting the new terminal, and to-date activity levels have convinced institutional owners that this is a submarket in which to have product. “Bayport is active because the Port of Houston anticipates 11 to 12 percent annual growth in shipments for several years to come,” Palmer says. “The warehouse stock to accommodate this growth is centered on the East Loop and is 25 to 30 years old. Users will continue to move toward this Port of Houston destination point for years to come.”

The other significant development area remains Northwest Houston where the epicenter of development is migrating from Beltway 8 at U.S. 290 to the area around Beltway 8 at Antoine and Interstate 45 North, Palmer says. “The Northwest development activity is in response to demand as well, though it is a blend of distribution space with flex product,” he says. “Around 3 million square feet of new space is planned for this area.”

There are several new developers in Houston such as Duke Development, Verde Development and IDI. Duke recently purchased the remaining land tracts at Westland Business Park and is actually pursuing more development sites. Verde will announce a new project later this quarter, and IDI is working on  a distribution center near I-45 North and Beltway 8.

Currently, owners are trying to attract energy-related, transportation, shipping operations and growing service companies to their Houston properties. “Energy-related companies are active in industrial and office space,” Palmer says. “Sizable deals have been completed by home improvement-related companies as well.”

The rental rates in Houston’s industrial market vary with the product type. For distribution space, the asking rates for new product are moving to $0.36 to $0.38 per square foot NNN with strike rates in the mid $0.30s. Second generation rates are range from $0.32 to $0.34 per square foot. “Rates are firm, though it is likely free rent will be a negotiation item once all the new construction comes on line,” Palmer says. The market is 95 percent occupied at this time.

— Micheal Palmer is senior vice president with CB Richard Ellis in Houston.

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