How hot can the industrial market get? No one knows the answer. But a recent report from CommercialEdge shows that the sizzle continues in this commercial sector, with the national average for in-place industrial rents rising 4.4% this February when compared to the same month one year earlier.
According to CommercialEdge’s most recent industrial report, the average in-place industrial rent across the top 30 markets in the United States hit $6.45 a square foot in February.
And the average price of industrial leases signed in February hit $7.35 a square foot. That is 90 cents higher than the national average for in-place leases.
And those aren’t the only strong stats for industrial. CommercialEdge reported that the national industrial vacancy rate averaged 5.2% in February, a drop of 30 basis points when compared to January.
At the same time, the average sale price for industrial space was $125 a square foot as of February. The average sales price for this sector has been on a steady upward trend for six consecutive quarters, increasing a jump of 50% from the third quarter of 2020 until the first of 2022.
Nationally, industrial transactions amounted to nearly $9.1 billion in the first two months of the year. According to CommercialEdge, this strong start is yet more evidence that investor interest in industrial properties is not slowing, considering that the first quarter of a year is typically the slowest for commercial real estate transactions.
Five U.S. markets exceeded the $500 million mark by the close of February in terms of transaction volume. Chicago industrial transactions ranked second in the country in this category, behind only Philadelphia, with $689 million in transactions.
Across the country, 592.5 million square feet of industrial space was under construction by the end of February, accounting for 3.5% of existing stock. The industrial pipeline has increased by more than 90 million square feet in the last six months, according to CommercialEdge.
“The biggest change to Houston in the past 24-36 months (and even longer though less pronounced) has been dealing with supply chain and logistics,” says JLL’s John Talhelm, senior vice president and national director.
Every company’s logistics formula differs, however, which affects where they perceive the best location to optimize the last mile, meaning getting product to consumer once it has already landed. Houston’s southeast and northwest submarkets are particularly in demand by those preferring to be near their goods’ point of entry or closer to their end-users.
Meanwhile, those who operate in supply chain management appear to have changed their approach to Talhelm observes: “Houston is now a regional distribution center.”
With the opening of the new Panama Canal, the Port of Houston is helping drive that new role, Talhelm says. Shipping direct from China to Houston lands goods in a high population center with access to others (totaling an estimated 50 percent of the state population) within a 4- to 4 ½-hour drive.
With federal regulations limiting drive-times for truckers, an optimal distance traveled within shift is about four hours, long enough to reach and return from San Antonio and Austin, Corpus Christi and Beaumont.
In review of 2017, the vacancy rate has remained at or below 5 percent. It’s currently 4.9 percent, JLL’s “US Industrial Outlook” reports, with availability following suit at 8.9 percent.
Developers are responding to continued demand for distribution-style space with new construction: 4.5 million SF is currently under construction, of which 37.9 percent is pre-leased.
“To the credit of lenders and developers,” there has been an even rate of space delivered to match demand, quarter by quarter, Talhelm says. “In my opinion, this (even pairing) is a win for developers and for tenants. Developers get predictability on their investment and tenants get stability of lease rates, which helps in their long-term planning.
Interest is increasing from institutional and foreign investors, with deal volume up for the year, the JLL Outlook also indicates. Examples include Pure Industrial REIT’s two-warehouse acquisition in Cedar Port Industrial Park from Clay Development; Prologis’ warehouse acquisition in the West by Northwest Industrial Park from TIAA-CREF; and Hines’ acquisition in La Porte of the five-building Underwood Distribution Center from Black Rock, which it rebranded as Independence Logistics Park..
In usage, four categories, particularly in the past two quarters, account for 56 percent of the overall industrial use, Talhelm notes:
Food & beverage
Paper & packaging
Some of this activity is a reflection of recovery from Hurricane Harvey, he says, since industrial space was not damaged by the storm in late August 2017. In the aftermath, several new leases have been in direct response to supporting recovery in the region. Home Depot, for example, inked a 300,000 SF lease in 3Q. While recovery-support leasing activity is likely to continue into 2018, “It’s hard to predict the length of the challenge” Houston faces.
Other players expanding their presence and footprints include Best Buy, Amazon, Walmart, Daikin and Ikea.
Looking to 2018, Talhelm expects these trends to continue, including construction of projects exceeding 500,000 SF that cater to e-commerce.
SAN ANTONIO: Steady and Adding Yards
Compared to the larger and diverse industrial markets of Houston and Dallas/Fort Worth, San Antonio activity is “pretty basic, with steady growth. It’s solid,” say Jason Schnittger, managing director at Stream Realty and Michael T. Kent, vice president, tenant rep and acquisitions.
The completion and delivery of 1 million SF in 2017 has affected the market’s vacancy rate, now at 10 percent for third-party properties, Schnittger says, which is about double that of a year ago for the estimated 40 million SF. The vacancy dynamic, however, means a more balanced market, he says. Previously, it was “landlord friendly.”
Among the 2017 deliveries: Stream Realty’s 400,000 SF I-35 Logistics Center near New Braunfels; Robinson Weeks Partners’ Enterprise III 360,000 SF in Shertz; and EastGroup Properties’ completion of two buildings totaling 160,000 SF in Eisenhauer Point.
Existing and new tenants are seeking the most functional of space, Schnittger says. That means high ceiling clear heights, plenty of truck parking, an abundance of high docks, optimal column spacing and ESFR sprinklers. “Tenants will pay top-of-market rent for top amenity, top functional properties,” he says.
The average rate for new Class A bulk space is approaching $5 psf, “something new for this market,” notes Kent. Older properties, with their narrow truck courts, limited truck ports and advanced ages — 30 to 50 years — are not leasing as well, even though they’re offered at a lower price point.
For Class B industrial space stuck between the Super A fully loaded properties and the older, obsolete properties now attracting redevelopment — if they are located well — “Landlords must decide how to differentiate,” whether it is by price, adding ESFR sprinklers or improving aesthetics, he says.
Also affecting inventory, though slightly, is the repurposing of well-located older and obsolete properties around the central business district into office, retail and flex space with live-work-play amenities. Mid-town and east of Broadway (near the Pearl or Houston Street) is doing quite well, he says.
And what of the less desirable obsolete industrial space? Given the consumer, there’s always a need to store things. Somewhere. “Even an old, dirty warehouse location can have use, though it might take longer to lease it,” Kent says.
Development is pushing out farther for available, accessible land that’s priced well to accomplish the same investment goals, Schnittger says. Whereas in the past the I-410/I-10 interchange was the edge of the market and the I-35 corridor particularly attractive for trucking goods, more recent projects are also seeking less congested locations that enable serving corridor growth, with facilities in San Marcos and New Braunfels, or on San Antonio’s east side to claim status as the first stop from Houston.
Examples in 2017 include TJ Maxx, 1.5 million on the south side (to be near labor, Kent explains); Carrier, 800,000 SF, also on the south side; and Amazon, 1.2 million SF in Shertz.
While spec industrial attempts to anticipate the most common functions, it can’t go too far out on a limb in new developments, Kent says. Still, these properties are boosting trailer storage and parking that can used by trucks or for employee parking since e-commerce distribution is more labor intensive than other forms of industrial use.
In San Antonio’s market, the yard concept is catching on, meaning storage that’s fenced but not contained, so it’s good for storing goods without height issues. That’s something of note for building materials providers but also the oil and gas equipment suppliers that the Eagle Ford shale development has prompted.
Another trend of 2017: users-as-buyers. “Growing companies that might have leased in the past now want to own their building,” Kent says. The supply is now low.
Looking to 2018, Schnittger says, “We think the effect of e-commerce isn’t going to change any time soon…The ‘Last Mile’ concept of supply chain/logistics is behind a lot of this.”
DALLAS/FORT WORTH: D is Dallas for Distribution
E-commerce remains the “needle-mover” in the D/FW market’s absorption numbers (as with all other major U.S. markets), says CBRE’s Steve Trese, senior vice president.
The region’s growing population, company relocations, strong economy and developable sites continue to feed the market’s increasing aggregation role in bulk distribution.
Put simply by Trese: “More jobs mean more people means more stuff needed.”
The top five deals (tracked through early December 2017) totaled nearly 5 million SF and were either consumer goods, direct to consumer e-commerce, or 3PL companies, he says. Direct e-commerce user Wayfair.com, for example, completed a lease for an 875,000 SF build-to-suit with Duke. Ancillary service providers are also active because of e-commerce activity: UPS, for instance, leased 1 million SF.
In the past five to 10 years, Dallas has boosted its role as an aggregation market for bulk distribution, company research indicates.
Another market factor: Let’s call it “the effect of the sophisticated e-commerce user”—and the impact that is having on distribution activity by other users in the market — or coming to the market — in how they locate, operate, and handle their logistics and employment.
What’s changing? Including amenities inside the industrial box. Air conditioning, for example. With heated competition for labor to work within these large facilities, Trese says, “We are seeing other large warehouses having to add amenities.”
CBRE Dallas market research indicates that 72.8 percent of the 56.2 million SF in deliveries tracked since 2015 were scaled 250,000 SF or larger. (And looking back a decade, to when e-commerce was not a factor, Trese notes, warehouse footprints have more than doubled, with the largest expansions coming to metro areas with big populations.)
Not all the distribution play is at the mega-scale end of the market, however. “There’s a lot of middle level e-commerce. Some are niche industries, but it’s pretty much across the board.” Also, smaller users and the mom-and-pops who might have been in 10,000 SF are looking at growing into 30,000 SF, and the 50,000 SF user is looking at 100,000 SF, he says.
And users are more interested in leasing than owning, Trese says, particularly as they become more sophisticated in their operations.
While most D/FW warehouses are sticking to pure distribution, omni-channel retail users (such as home furnishings and car part suppliers) are also using warehouse space for traditional retail store support and e-commerce fulfillment, according to Miller Hamrick, CBRE industrial research coordinator.
Meanwhile, proximity to the major population base is bringing second life to some infill locations, Trese adds, particularly in providing last mile distribution for quick delivery.
Shopping malls, for example, might see some new life if repurposed or replaced with industrial use given their logistics-friendly locations of good access, Hamrick says. An example is the former Six Flags Mall site, slated for a two-building 1.4 million SF industrial complex by Northpoint development.
JLL’s Craig Jones, managing director, says the D/FW market in 2017 shaped up pretty much as forecasted a year ago, meaning 2017 was like 2016, though slightly lower in absorption due to significant deliveries this year (nearly 20 million SF), and more in the pipeline in terms of space and users.
The average vacancy rate slipped slightly to 7.3 percent through Q3. “There’s no reason to be concerned,” he says. “The healthy market will accommodate it…and with landing two or three significant deals we should get sub 7 percent again.” Plus, deliveries are slowing down a little.
Any lag time will have no long-term effect on vacancy in the most historically active submarkets, according to JLL’s outlook report.
And while the South Dallas submarket’s vacancy rate is highest, that also means it has the highest opportunities, so “tenants are circling,” he says.
“There is still opportunity within traditional submarkets,” he says. However, quality sites are dwindling.
“If there’s a new frontier, it’s McKinney,” where some speculative and build-to-suit users are now scoping out sites. They’re following the rooftops, he says, as regional population has migrated beyond Plano, Frisco and Allen. “We’ve been discussing McKinney (opportunities) for several years,” he says. “It’s not a matter of ‘if’ but ‘when.’”
In 2017, which Jones described as “just normal activity,” there were no curve balls, either pleasant or unpleasant. “No submarket lost its luster.” Looking to 2018, he expects distribution activity will continue to be generated by the region’s hub infrastructure, economic engines that are attracting both new and relocated operations, business-friendly jurisdictions and labor force. The latter is not just a D/FW factor, it’s a challenge nationally, he says.
If a year ago the 2017 forecast expected a repeat of 2016’s “healthy with good activity,” 2018 is looking like a repeat of the repeat, Jones says.
Like many in the industrial market, he calls that continuation “momentum.”
When it opens its doors in 2019, Skanska’s Capitol Tower will reach 35 stories into the downtown Houston skyline, offering up 775,000 square feet of Class-A office and retail space. Six and a half floors of the sustainable building, totaling 210,000 square feet, will be occupied by Bank of America.
“That was by far the most unique deal I worked on in 2017,” says Kristen Rabel, senior vice president of CBRE Houston. “It was exciting to work with a large tenant and get them to understand the vision of Capitol Tower.”
She, along with CBRE’s Warren Savery and Rima Soroka worked on the deal that ultimately triggered Skanska to kick off construction and bring Capitol Tower out of the ground.
“Capitol Tower is a game-changer for downtown office space in Houston, so it is an honor to have such a prestigious, global firm like Bank of America as our lead tenant,” Matt Damborsky, executive vice president for Skanska USA Commercial Development in Houston, said in a statement.
Billed as “Tomorrow’s workplace, today,” the building is focused on a “newer, younger and greener Houston.” It’s a prime example of what the larger tenants in Houston are looking for in 2018: new product with modern, flexible and collaborative office space.
“More than ever, tenants are focused on recruiting and retaining talent and trying to stay in forefront of the changes in technology and how they affect the use of office space,” says Rabel.
Working the office market in the hub of the oil industry hasn’t exactly been easy after oil prices bottomed out, but 2018 looks promising. CBRE reports that Houston’s office market marked positive net absorption (325,000 square feet) in the final quarter of 2017 – for the first time in 18 months.
“With oil prices staying above $60 a barrel, we are starting to see tenants make long-term decisions regarding their office space,” Rabel says. “In addition, we have had positive job growth so we are definitely trending in the right direction to get Houston back on track.”
Overall office vacancy also dropped in Q4 as sublease listings decreased by about 1.3 million square feet.
“We are slowly coming back and the market is on its way to positive growth,” says Rabel. “I don’t think we will see the robust growth like we have had in the past few years, however the positive absorption we saw in the fourth quarter indicates that modest occupancy gains may continue to materialize in the near-term.”
IN DALLAS: “Clients expect all of the amenities”
If you’re renewing a lease in the Dallas market this year, get ready to pay more, says Scott Bumpas, managing principal for Cresa’s Dallas-Ft. Worth office.
“I would suggest starting the process as early as you can,” he says.
Bumpas says a slate of corporate relocations to the market (including Fannie Mae, Goldman Sachs and Alston & Bird) are eating up space and driving up value in some parts of town.
“We probably have a little less leverage right now, especially in the hotter markets like Uptown and Legacy. Submarkets outside of those areas afford us a little more leverage,” he says. “Overall, landlords in the Dallas Ft. Worth markets are fair and look at the long term when things may change back more to the tenant’s advantage.”
Vacancy in DFW is sitting at about 19 percent, after 5.7 million square feet of net absorption in 2017. Still, there’s another 5.3 million square feet under construction right now. A lot of that space is geared toward modern clients, who have different needs and desires than tenants even a decade ago.
“Clients expect all of the amenities of Class A buildings to attract and retain top talent. This includes tenant lounges, fitness centers, common training rooms, restaurants, and high-speed network connections to name a few,” Bumpas says.
Parking is also a significant issue for clients in a city where many buildings have parking ratios of three per 1,000 square feet.
“We have many clients that need significantly more parking than the older buildings can provide,” says Bumpas.
Those clients are varied, though he notes that more technology-related companies are coming on board.
“When asked, we are told that these companies prefer the entrepreneurial culture of our company to the large publicly traded real estate firms,” Bumpas says.
He can’t name names (Crensa has a policy against it), but Bumpas says he’s working on a sizable renewal in Frisco for a well-known international client.
“As hot as the Frisco market is, we were able to work with the owner to structure a creative renewal that was great for our client and enabled the owner to structure a refinance that helped them with their long term ownership,” he says.
IN SAN ANTONIO: “That area is exploding”
Looking ahead to 2018, Transwestern’s executive managing director of its San Antonio office, Larry Mendez, is optimistic about the year to come after what he calls a “strong” ‘17.
“We ended with positive absorption and significant rate increase,” he says of the office market in San Antonio. “There’s a lot of new product and it’s doing well.”
According to Q3 data compiled by Transwestern, some big deals drove that absorption, including tenants filling up the Landmark One building, the Airport Center and Callaghan Tower, to name a few.
“If someone had told me six years ago that people would be doing $27 to $35 Triple Net office deals, I would have found that very hard to believe,” Mendez says. “We’ve seen rates push high, higher than they’ve ever been. We’ve also seen a lot of new construction hit.”
In the past two years alone, more than 1.62 million square feet of office product has come online in San Antonio. It’s already averaging an occupancy rate of 60 percent. The influx of new space is changing the landlord-tenant dynamics, especially when it comes to subleasing.
“If you have a tenant in a downtown submarket, it’s a landlord’s submarket. You go deep northwest in San Antonio and it’s more of a tenant’s submarket,” Mendez says. “What I have seen is for the first time is a big discrepancy between the submarkets.”
As evidence that the downtown San Antonio submarket is tightening, he points to USAA buying Bank of America Plaza. The only other Class-A tower is IBC, which is full, according to Mendez. Even the Class-B tower owned by USAA is full.
“What that does is it changes the market dynamics,” he says. “It certainly turns it into a landlord market, especially for quality space for Class-A space.”
By comparison, Mendez points to office availability between I-10 and U.S. 281, as well as on Highway Loop 410, which has big blocks of space open in every single building. Prices there, he says, are $6 to $7 less per square foot.
“When you go out to the suburbs, there’s just more and more competition; there’s new product that’s continuing to deliver,” Mendez says. “In the northwest, we have probably 250,000 to 300,000 square feet that’s going to deliver in the next six months.”
One of the projects he’s most excited to watch unfold in 2018 is going up across the street from The Pearl, which is about to deliver 400,000 square feet of space that is already 100 percent leased.
“That area is exploding,” says Mendez.
He and his partners represented the San Antonio Independent School District in the sale of 14 acres along Broadway St. to GrayStreet Partners. The developers plan to build apartments, a hotel, offices, retail space and parks on the property.
“This project will will be very symbiotic with what The Pearl’s doing,” says Mendez. “It’s completely changing that midtown submarket.
Coupled with what’s happened in downtown, he says, it’s a landlord’s submarket for the first time in 30 years.
IN AUSTIN: “Rates are going up”
The power of the landlord seems to be a theme in Central Texas for 2018.
“If you are a landlord, the market is great,” says Ford Alexander, executive managing director of Cushman & Wakefield’s Austin office. “If you are a tenant, the market is brutal.”
In 2017, companies like Facebook, Google, Indeed and Expedia signed massive office leases in Texas’s capital city, helping the city reach 627,000 square feet of net absorption.
“We are in the ninth year of the growth cycle in Austin and it looks like demand will continue through 2018,” Alexander says. “We need more space to handle expansion projections and supply in the short term will not keep up with demand. We all know what that means: rates are going up.”
Because of the increase in price, Alexander says clients are looking for ways to be more efficient. He lists Facebook, Amazon, Apple, Google and Oracle, which all have a large presence in Austin, as companies that are building their own amenities in their spaces as a way to recruit and retain talent.
“The largest of these is the kitchen and dining facilities where they serve three meals a day.,” he says. “Tenants are wanting to locate close to restaurants, bars and entertainmen, thus driving the demand for CBD and the Domain.”
Those areas, says Alexander, are the hot spots that command the highest rates right now. A lack of amenities is hurting the Loop 360 area, however.
That evolution is just a result of Austin’s significant maturation in the past decade, he says.
“Ten years ago, the majority of the market was made up of home-grown tech companies, along with local and regional professional firms and a smattering of branch offices for larger companies,” Alexander says.
Today, tech giants call Austin home and, as they grow, so does the demand for office space.
“Leverage for tenants is minimal and down from last year due to the lack of supply,” says Alexander.
That pushes him and his clients to get creative when it comes to finding a location that will fit their needs.
“We moved a client that had term on their lease remaining to a larger building that was previously a music venue,” Alexander says, reflecting on one of his most unique projects of 2017. “The goal is to utilize part of the building as office space for the company, utilize part for co-working and revitalize the music venue for events and shows at SxSW.”
Overall, the men and women working in the Texas office market seem to be looking forward to a promising 2018. Whether it’s a return to normal in Houston, a rush of new space in Dallas or a landlord-tenant battle in Central Texas, the year holds many opportunities in a state where business is booming.