Industrial Boasts Single-Digit Vacancy

In other words, while the news wasn't great, vacancies a year ago at this time were trending around 4% and 5%, it isn't horrible. "Unlike in other cycles, Houston didn't get too far ahead of itself on the supply side," comments Transwestern managing director Brian K. Gammill. "Plus we had a strong existing occupancy base of 94%." It's easier, he continues, to work with a 94% occupancy base when a recession hits than, say, a 90% occupancy base.

John Nicholson, senior vice president with Grubb & Ellis Co.'s local office credits the industrial developers for being conservative and thinking correctly. They learned from the overbuilding craze in the 1980s, and were more careful this time around, he says.

But some areas starting to struggle with oversupply, most notably the far east side. A lot of developers built huge facilities on spec at the Port of Houston. However, with trade down due to the global slowdown, the Port is starting to feel some pain, too; as is the real estate that sprang up to serve it. Exports are falling off, while imports are going from ship, to intermodal, to the rest of the country rather than remaining in Houston warehouses.

Added to the fact was that building was out of control in that area during the mid-2000s. "Three or four years ago, everyone wanted to be at the Port, so everyone put their buildings there," Nicholson says. "It was crazy."

The result is a lot of vacant product, especially warehouse space, in the far east submarket. Transwestern's report puts the East-Southeast Far submarket at 13.5% vacancy, including sublet space. The total inventory in that area is 34 million square feet, with 1.8 million square feet under construction. The Grubb & Ellis numbers for East Southeast Far have 30 million square feet of inventory and a 20% vacancy.

And all of Houston is hunkering into recession mode in the area of lease negotiation. Nicholson and Gammill say short-term deals are more common, as are more free-rent concessions. In the meantime, owners and property managers are doing what they can to ensure tenants are taken care of.

On the tenant side, "we seeing renovations on the front end, higher improvement dollars," Gammill comments. "Landlords are willing to do that to minimize carry costs. Then, when the market turns around, they'll have the tenants in place. They're trying to secure income streams."