(To read more on the industrial market, click here.)

HOUSTON-Recent demand for industrial space has led to low vacancy rates and stepped-up construction from one end of the city to the other. And with the interest from investors and tenants, local experts caution about possible overbuilding, particularly in the far northwest.

In its latest report, Grubb & Ellis Co.’s local research team says the far northwest’s vacancy is 5.3%. The metro’s average vacancy is 5.8% or 22.3 million sf, the lowest it’s been in seven years in the 381.7-million-sf inventory. In the far northwestern tier, its 72.3-million-sf base has 3.8 million sf sitting empty.

“Three years ago, within that submarket, the vacancy rate was around 11.5%,” says Ariel Guerrero, client services manager for Grubb & Ellis’ local office. “A lot of that has been attributed to logistics companies coming into the area.”

Guerrero says much of the space in the far northwest was built as pure spec in the heyday of the late 1990s and early 2000. “A lot of space was delivered in that submarket, but not preleased before the tech meltdown,” he tells GlobeSt.com. “That left a lot of vacant space just sitting there until the recent demand.”

David Cook, executive vice president in Houston for Cushman & Wakefield of Texas Inc., says the hunger to build in the far northwest dates back nearly 30 years as development costs rose elsewhere in the area. “With the opening of the Northwest Freeway, land was available and not as expensive so it became a hot area for concentration of industrial warehousing,” he says.

Guerrero and Cook concur that overbuilding in areas like northwest and the far eastern submarket near the port are likely to cause vacancy rates to climb in coming quarters. Nearly 1.9 million sf has been delivered market wide so far in 2006 and 1.9 million sf more coming in the next year. The far northwest is leading the way with 1.1 million sf of spec and build-to-suit space under construction.

“It’s the nature of the development cycle,” Cook tells GlobeSt.com. “We’re under-built right now. And yes, we’ll come into balance and yes, if money continues to be available for financing we’ll be overbuilt in the northwest and elsewhere. Lenders are looking favorably on industrial in general and Houston because of the oil and gas industry and the economy.”

Guerrero says Houston is again on everyone’s radar screen. “Ever since Wal-Mart came on line last year, a lot of companies are looking at Houston and reevaluating their supply chains,” he says.

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