Houston, TX Q4 2022 Industrial Report

The Houston industrial real estate market exhibited excellent growth during the last quarter of 2022, with positive absorption and high industrial sales volumes. Houston’s active construction scene is responding to increased demand from shippers finding more efficient supply chains. 

Rental rates also increased—albeit at a slower rate than in previous quarters. Houston’s high employment growth is expected to drive future rental increases across 2023. 

Area Overview and Demographics

Houston is the largest city in both Texas and the Southern United States, with a population of 2.3 million as of 2023. 

The average age is 33, and the median household income is $53,600. Houston has traditionally had strong economic growth thanks to its lax land-use policies and activity in fossil fuels and manufacturing. 

The city of Houston has a humid subtropical climate, with long, wet summers and short, mild winters. The city receives substantial rainfall, and many areas are at annual flood risk due to impermeable clay soil. 

Houston has a large and diverse economy with significant presences in energy, manufacturing, biomedical research, and aeronautics. The city is home to several Fortune 500 companies, such as Phillips 66, Sysco, ConocoPhillips, and Halliburton.

Summary of Houston Industrial Performance in Q4 2022

The Houston industrial market posted excellent growth this quarter with over 5.4 million square feet of positive absorption, averaging 28.9 million square feet of positive absorption across all of 2022. The majority of positive absorption came from the Northwest, Southwest, and Southeast Corridors. 

Vacancy rates were also low at 5.6%—a 90 basis point decrease from the beginning of the year at 6.5%. The Northwest Corridor saw the greatest drop in vacancy rates from 6.6% in Q3 2022 to 5.9% in Q4 2022, while the Northeast Corridor had the largest increase in vacancies from 5.1% in Q3 2022 to 6.1% in Q4 2022. 

Overall, the industrial market in Houston outperformed all other asset classes. The strong performance is set to continue into the new year with relative stability. 

What Are Industrial Rents Like in Houston?

Industrial rents rose 1.5% from $8.87 per square foot in Q3 2022 to $8.99 per square foot in Q4 2022. Rents have continued to increase over the year from $8.01 in Q1 2022, but the previous quarter’s increase was much smaller than earlier this year. 

The submarkets with the highest industrial asking rates were in the Southwest Corridor and Northwest Corridor at $10.62 and $9.21 per square foot. Leasing activity in most industrial submarkets remains very strong, so investors can expect regular rental increases over the foreseeable future. 

Purchase & Leasing Activity

The Houston industrial real estate market experienced significant leasing activity across Q4 2022 at over 11.2 million square feet. Leasing activity finished the year higher than last year’s total of 48 million square feet. High interest rates did cause slight slowdowns in purchasing activities, but pricing did not decline over the quarter. 

Shipping and storage seem to be the main driver of the high leasing activity, with the Port of Houston posting double-digit volume growth over the past year. Moreover, the port will soon finish its Project 11 to widen and deepen the channel, generating an estimated $134 million in additional container volume. 

Notable Industrial Space Deals in Houston in Q4 2022

Leasing activity was high this quarter, with many notable transactions, including:

• Fresh Pak’s 295,700 square foot lease at 290 Eight Distribution Center;
• Chadwell Supply’s 247,200 square foot least at Port Crossing Commerce Center;
• Cedar Port Distribution’s 405,600 square foot sale at East-Southeast Far;
• An 87,900 square-foot sale at 5630 Renwick Dr.; and, 
• A 71,400 square foot sale at 701 Sycamore Rd. 

As Houston completes several development projects in the future, leasing activity is expected to increase. 

New Industrial Development Activity in Houston in Q4 2022

The Houston industrial market ended the year with over 700 million square feet in total industrial activity after adding 4.9 million square feet in Q4 2022. Supply additions were slower this quarter than in the previous two quarters, but construction activity is proceeding strongly. 

By the end of Q4 2022, Houston had over 33 million square feet of industrial space under construction—nearly double the amount of 19 million in Q4 2021. The city has an additional 55 million square feet of additional space in the development pipeline for 2023.

Below is a table showing some important developments and their expected delivery dates. 

Market Forecast for Houston’s Industrial Market in 2023

Houston’s industrial activity is expected to remain strong as demand grows and leasing activity continues to rise. The city has several high-profile developments underway that will bring more industrial traffic in 2023, and high employment growth means firms will need industrial space. 

Rising interest rates will likely cause a slight slowdown in purchasing activity as the gap between developers and sellers widens. However, activity is still strong enough that listing prices will continue to increase. Stabilizing interest rates will likely drive future sales volume. 

Takeaways for Industrial Investors

Industrial investors are in a good spot as Houston’s activity continues to grow. The best option for industrial space in Houston is in the shipping and container industries. The high growth in these areas reflects general economic growth in the Houston metro. 

As always, stay vigilant, do your research, and happy investing.