New construction providing needed options to industrial tenants

With a market-wide vacancy rate of 4.9 percent, Houston’s 10.6 million-square-foot industrial construction pipeline is providing much needed options to tenants in the market, and they’re taking advantage of new supply.

According to JLL research, construction activity grew for the fourth quarter in a row and is up 80.5 percent year-over-year. As a sign of developer confidence in the market, 76.8 percent of the pipeline broke ground speculatively. Developers are bullish on Houston and lenders throughout the capital stack are getting aggressive for new industrial construction projects.

Current developments are also furthering Houston’s evolution into a big box market. The six largest projects underway are all more than 500,000 square feet in size. Moreover, tenants are gravitating toward modern product. Four of the five largest leases in the second quarter were signed for buildings built in 2016 or later.

Investor interest is soaring, as Houston emerges as a formidable distribution market. The buyer pool looking at Houston has grown significantly more diverse in recent years. REITS remain most active in the market, but local and regional owners are partnering with both institutional and international capital to aggressively compete in the space.

While the market experienced a rare quarter of negative absorption in the second quarter, it is not a point of concern. Historical data shows it is not unusual for the market to experience wide swings in absorption quarter to quarter. The industrial sector outlook is strong, with healthy leasing activity and a hardy demand pipeline from the retail and consumer goods industries.