Industrial Vacancy Makes Biggest Gain in Five Years

HOUSTON-An active year among the industrial real estate market has yielded a 6.1% vacancy rate--the lowest in 5.5 years in the area's 373-million-sf inventory. A total of 10.5 million sf of space was filled.

Grubb & Ellis Co.'s local research team says the strongest activity was the warehouse and distribution sector, which accounted for nine million sf of last year's net absorption. The office sector's closest competitor, research and development and flex space, fell 65,273 sf below its historical norm.

Ariel Guerrero, the brokerage house's client services manager, acknowledges that the numbers were helped just a bit by Bentonville, AR-based Wal-Mart Stores Inc.'s four-million-sf distribution center in the Baytown area. "The market has been extremely active during the past couple of years in general," Guerrero says. "There hasn't been a lot of product coming on line, but demand is increasing for the space. A lot of this has been driven by an increase of imports through the Port of Houston."

As a result, one of the hotspots is the East Southeast Far submarket, which has a 2.5% vacancy in a 19.3-million-sf inventory. Its year-to-date absorption is 4.3 million sf. The submarket's average rent is $4.23 per sf for warehouse space and $7 per sf for flex product.

Guerrero tells GlobeSt.com that the other area of note is the far northwest submarket, where industrial rents are running from $4.50 per sf to $8.27 per sf. Absorption last year totaled two million sf in its 36 million sf of product, which is just 6% vacant. Though says it's not the lowest vacancy rate in the area, the solid ranking emerged due to less construction, according to Guerrero.

On the construction front area wide, Guerrero says much of what did deliver last year was smaller, buildings ranging from 15,000 sf to 50,000 sf. "That's why the vacancy declined," he concludes. "There simply weren't all that many large industrial projects that came on line. The demand was for smaller projects."

Plus, Guerrero points out that not a lot of the new product was speculative. "For the entire year, more than half the annual absorption growth occurred in build-to-suits and owner-occupied development," he explains. "This accounted for more than two-thirds of new construction."

Guerrero speculates this year will bring more demand-driven construction, continued strong absorption and falling vacancy. "It won't be a dramatic drop like we saw in 2005," he adds, "but it'll continue to decline."