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HOUSTON-After five years of declining industrial development, speculative construction in 2005 is expected to increase as much as 50% compared to this year. “Speculative construction was very conservative this year–most of the activity was build-to-suit,” says Darryl Noon, an industrial broker with Transwestern Commercial Services Inc. “Next year, speculative industrial development will increase, probably as much as 50% to more than one million sf.”

Noon tells GlobeSt.com that as interest rates continue to increase, industrial users will move away from buying facilities and return to leasing space as the more economical choice. To that end, he expects that developers will start delivering more speculative space rather than build-to-suits.

There is nearly two million sf of industrial space under construction in the Houston metropolitan market, according to Alexandria, VA-based Delta Associates, a subsidiary of locally based Transwestern. About 2.2 million sf of industrial space was delivered this year, down from 3.1 million sf in 2003 and 4.4 million sf in 2002.

As Houston’s economy strengthens, Noon expects that 2005 will post even stronger positive absorption than this year. “We’ll start to see both smaller and larger deals,” Noon says.

So far this year, nearly five million sf of industrial space has been absorbed, the highest level in three years, according to Delta Associates. The research firm notes that available industrial sublease space has decreased by 1.8 million sf in 2004. As a result, here is now just under two million sf of industrial sublease space available in the Bayou City.

In particular, Noon points to activity in Sugar Land and Fort Bend County, where several projects were recently announced. Tramontina-USA Inc., for example, tapped ProLogis to develop a 234,000-sf build-to-suit at ProLogis Park Sugar Land Corporate Center. When the facility is completed, the Brazilian manufacturer of cookware and cutlery will have more than one million sf of distribution space in Fort Bend County.

With such strong absorption this year, the overall industrial vacancy rate dropped to 8.8% in the third quarter 2004, from 9.7% for the same period last year, according to Delta. The direct industrial vacancy rate is 8.3%, and that rate is expected to decrease in the coming year, Noon says.

Overall industrial rents rose by 1% in 2004 to an average of $4.16 per sf for warehouse and distribution space, according to Delta. “We should see rents tick up in 2005,” notes Noon.

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