Houston Pros Eye Industrial Sector Warily

HOUSTON-The industrial sector's wild ride of last year has mellowed out, leaving in its wake somewhat slower demand and an owner's market. But real estate experts tell GlobeSt.com to watch out in the coming months.

With up to 4.2 million sf of coming online in a few months along with slowing demand, the current landlord's market could dissolve. According to a recent report released by Grubb & Ellis Co., the industrial market has absorbed almost four million sf year to date. In the 362.2-million-sf inventory, 21 million sf remains vacant or 5.5% of the market.

To no one's surprise, the territory near the Port of Houston continues to be strong, with a year-to-date absorption of 527,836 sf. Meanwhile, a little more than one million sf in that area is vacant. The 20.8-million-sf inventory is 4.9% vacant.

Across the area, the northwest far submarket has a little more than 3.7 million sf remaining out of its 72.3 million sf. To date, 1.3 million sf has been absorbed, putting the vacancy rate at 5.2%.

Despite the incredible shrinking inventory, Micheal Palmer, CB Richard Ellis' senior vice president, says demand has definitely slowed from a year ago.

Ariel Guerrero, a Grubb & Ellis Co. associate, agrees. "In terms of leasing velocity, it's slowing down a bit, but still an active market," he says. But as is true with all real estate cycles, change is a-coming. With a good chunk of space slated to come online within several months, the experts predict the market is flipping into a tenant one. East southeast far will see nearly two million sf deliver in the coming months, with the northwest following on its heels with 1.9 million sf scheduled to deliver by this time next year.

"Houston has become a hot spot for industrial construction because of growing industrial demand," Guerrero explains. "Energy, increased capacity from the port of Houston and a lot of retailers and manufacturing and logistics firms wanting to have their operations within striking distance of the ports have driven construction on the east side."

The northwest market has been no slouch, either. Its proximity to Bush Intercontinental Airport is one reason for the growth, but "northwest Houston has been a high-growth area for the past 10 years," says Tyndall Yaap, vice president with Grubb & Ellis in Houston. "A lot of major manufacturing has shifted from east Houston to northwest Houston--also oil companies. They all want to be out there."

However, Yaap continues, supply most likely will outstrip demand once the new space is delivered to market. "Everyone seems to have had the same bright idea at the same time, to develop in that quadrant," he says. "We are looking at a danger of overbuilding."

For the tenants, too much space will likely be a good thing. "Because demand has been so strong, it hasn't been possible for tenants to ask for concessions like free rents and build-outs," Palmer points out. "But with demand going flat, it makes it easier with the product coming to market for tenants to be a little more assertive for them to have more of an upper hand."

Yaap agrees with Palmer's assessment, pointing out that all the space coming on at the same time will put tenants in an interesting position. "The whole situation will flip everything into a tenant's market pretty quickly," Yaap predicts.