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Q1 2019 INDUSTRIAL MARKET REPORTTRENDING NOWWritten by Justin Cole

A market record 16.2 million square feet of industrial product is under construction, up approximately 10% from the fourth quarter of 2018. Construction deliveries have also increased from last quarter, with 3,491,685 square feet completed year to date. The trend of quoted rental rate growth reversed, as asking rates marginally decreased 1.2% to $7.05. Net absorption, per CoStar Industrial Statistics, was a positive 2,000,490 square feet. Absorption accounted for 57% of the deliveries in the first quarter, whereas it comprised 88% of construction completions last quarter. The decrease in positive absorption, coupled with the delivery increase, resulted in the market vacancy rate growth of 20 basis points. Although the current vacancy rate of 5.8% is indicative of a healthy market, it has continued to move upward year over year since 2014.

Port Houston continues to serve as a catalyst for the industrial market, specifically in the East/Southeast submarkets. According to the Houston Ship Channel Economic Impact Study, the port generates $339 billion in state economic value, up roughly 28% since 2014 and equivalent of 20.6% of the state’s GDP. Consequently, developers are bullish on the Southeast Corridor, which contains more than one third of all inventory under construction. The East-Southeast Far Industrial submarket alone made up more than half of all market absorption in the first quarter, with notable leases signed by Plantgistix (337,040 SF) and MRC Global (127,256 SF). Look for the trend of plastic resin and logistics companies seeking locations near container terminals to continue throughout 2019.

A positive outlook on industrial development is not just apparent in the Southeast submarket, but can be seen throughout the entirety of the Houston Metro. The staggering amount of product being built is likely due to several trends, both at the market and national levels. Despite oil being down over the past year, Houston added the third most jobs of a major MSA in 2018, signifying overall market health is not as dependent on the energy sector as prior years. Intuitively, job growth is a causal factor of the population growth Houston experienced last year. The increased population, compounded with the prevalence of e-commerce, creates the need for more final-mile logistics facilities. The population growth is also positively correlated with land prices. While land is getting more expensive, and interest rates are remaining relatively low, developers are choosing to build now in anticipation of Houston’s projected growth.

HOUSTON ECONOMY SPOTLIGHT

MARKET INDICATORS

Sources: Greater Houston Partnership©; CoStar Property®

CONSTRUCTION: Construction starts in metro Houston totaled $1.1 billion in February ’19, a 13.8 percent decline from $1.2 billion in February ’18. Through the twelve months ending February ‘19, starts totaled $21 billion, up 18.8 percent from $17.6 billion for the previous twelve months.

BUILDING PERMITS: City of Houston building permits totaled $475.5 million in March ‘19, down 6.6 percent from $509 million in March ‘18. For the twelve months ending February ‘19, city permits totaled $2.8 billion, down 7.8 percent from $2.9 billion in the twelve months ending February ‘18.

TRADE: More than $233.3 billion in foreign trade passed the Houston-Galveston Customs District in ‘18, a 9% increase over ‘17 which was the largest increase among the nations’s twenty busiest districts. Houston remains the seventh overall busiest U. S. Customs District.

Rig CountAs of 03/25/2019

Source: Baker Hughes Rig Count Overview & Summary

United States Last Count March 25, 2019 Count 1,006 Change from Prior Count -10 % Change from Last Year -1.0

WTI PriceAs of 03/25/2019

WTI Crude Oil (Nymex) Units USD/bbl. Price $59.49 Change from Last Year -$5.45 % Change from Last Year -8.4%

Source: Bloomberg Markets Energy Markets / Crude Oil & Natural Gas

VACANCY

NET ABSORPTION

RENTAL RATE

Q3 2018 Q4 2018 Q1 2019

Q3 2018 Q4 2018 Q1 2019

Q3 2018 Q4 2018 Q1 2019

MARKETEXISTING INVENTORY VACANCY YTD NET

ABSORPTIONYTD

DELIVERIESUNDER

CONST SFQUOTED

RATES# Blds Total RBA Direct SF Total SF Vac %

Austin County Ind 34 1,642,197 21,454 21,454 1.3% 564,620 0 0 $10.23

CBD-NW Inner Loop In. 521 12,479,585 606,189 611,093 4.9% (7,065) 0 0 $10.82

Downtown Houston Ind 901 32,368,070 1,302,197 1,427,158 4.4% 261,207 0 0 $6.35

East I-10 Outer Loop. 216 14,023,334 485,187 485,187 3.5% (134,187) 0 0 $7.79

East-Southeast Far I. 2,195 74,913,799 4,645,919 5,030,944 6.7% 1,024,779 1,259,830 5,242,419 $6.60

Hwy 290/Tomball Pky . 665 25,114,761 2,380,072 2,529,867 10.1% (185,752) 680,073 381,438 $8.07

Hwy 59/Hwy 90 (Alt) . 1,043 26,121,960 1,021,646 1,034,392 4.0% 245,226 0 86,000 $7.32

Liberty County Ind 64 1,392,107 87,349 87,349 6.3% (7,600) 0 0 $6.01

North Fwy/Tomball Pk. 948 28,208,369 2,118,828 2,305,593 8.2% 404,846 142,670 2,607,907 $7.94

North Hardy Toll Roa. 849 36,604,176 2,038,658 2,130,488 5.8% (29,000) 161,490 2,297,691 $7.42

North Inner Loop Ind 196 5,315,233 405,940 405,940 7.6% 40,201 0 0 $4.51

North Outer Loop Ind 1,090 24,882,655 787,721 819,956 3.3% 181,827 0 354,236 $6.62

Northeast Hwy 321 In. 110 1,835,638 22,886 22,886 1.2% (1,100) 0 0 $7.83

Northeast Hwy 90 Ind 645 20,519,183 1,022,928 1,034,328 5.0% 35,574 444,000 850,200 $6.98

Northeast I-10 Ind 171 4,447,020 271,564 271,564 6.1% (5,969) 0 0 $5.33

Northeast Inner Loop. 190 12,148,417 673,914 723,414 6.0% (85,478) 0 0 $4.20

Northwest Hwy 6 Ind 417 12,863,728 1,156,612 1,156,612 9.0% 58,572 41,375 226,001 $6.15

Northwest Inner Loop. 1,783 64,174,527 4,139,001 4,358,819 6.8% (276,662) 84,000 22,166 $7.85

Northwest Near Ind 828 20,131,731 1,017,991 1,086,339 5.4% (261,536) 0 32,200 $6.55

Northwest Outliers I. 621 26,998,633 2,005,625 2,047,334 7.6% 286,035 512,235 1,542,324 $8.21

San Jacinto County I. 7 50,396 3,645 3,645 7.2% (3,645) 0 0 $0.00

South Hwy 35 Ind 1,768 39,987,025 1,243,824 1,313,024 3.3% 131,823 17,000 42,000 $6.02

South Inner Loop Ind 405 13,329,852 558,884 562,884 4.2% 11,567 0 0 $9.41

Southeast Outer Loop. 422 18,036,941 586,640 604,390 3.4% (144,324) 0 526,094 $7.96

Southwest Far Ind 595 14,226,247 812,614 820,417 5.8% 124,892 0 1,558,057 $9.46

Southwest Inner Loop. 451 8,284,381 292,250 292,450 3.5% (27,570) 0 0 $9.48

Southwest Outer Loop. 695 14,874,492 907,229 930,072 6.3% (59,614) 0 4,500 $9.71

Sugar Land Ind 513 22,704,613 903,245 933,119 4.1% (140,842) 30,040 216,579 $7.62

The Woodlands/Conroe. 1,131 21,639,615 1,807,372 1,905,611 8.8% 161,879 87,800 209,175 $9.27

West Outer Loop Ind 822 27,417,363 1,488,429 1,502,429 5.5% (162,214) 31,172 18,000 $7.74

TOTALS 20,296 626,736,048 34,815,813 36,458,758 5.8% 2,000,490 3,491,685 16,216,987 $7.44

Source: CoStar Property®

INDUSTRIAL MARKET STATISTICS

PERIODEXISTING INVENTORY VACANCY

NET ABSORPTION

DELIVERIES UC INVENTORYQUOTED

RATES# Blds Total RBA Direct SF Total SF Vac % # BLDGS TOTAL RBA # BLDGS TOTAL

RBA

2019 1q 2,241 52,926,292 4,994,947 5,141,529 9.7% (120,275) 5 186,626 14 173,981 $10.04

2018 4q 2,237 52,745,666 4,686,065 4,840,628 9.2% (136,144) 2 13,818 10 273,190 $9.83

2018 3q 2,234 52,727,998 4,541,774 4,690,666 8.9% 198,205 3 54,751 11 281,008 $9.87

2018 2q 2,230 52,630,047 4,606,628 4,790,920 9.1% (129,603) 1 8,400 11 322,754 $9.95

2018 1q 2,226 52,550,481 4,413,519 4,581,751 8.7% 105,122 2 8,650 8 172,295 $10.01

FLEX

WAR

EHO

USE

PERIODEXISTING INVENTORY VACANCY

NET ABSORPTION

DELIVERIES UC INVENTORYQUOTED

RATES# Blds Total RBA Direct SF Total SF Vac % #BLDGS TOTAL RBA # BLDGS TOTAL RBA

2019 1q 18,055 573,809,756 29,820,866 31,317,229 5.5% 2,120,765 44 3,305,059 145 16,043,006 $7.05

2018 4q 18,011 570,548,167 28,865,393 30,182,705 5.3% 2,552,886 44 2,724,495 146 14,419,131 $7.14

2018 3q 17,964 567,918,443 29,028,484 30,105,867 5.3% 2,774,650 47 4,397,877 150 13,570,995 $7.01

2018 2q 17,900 563,546,119 27,317,939 28,532,580 5.1% 1,087,312 32 2,081,515 170 13,078,804 $6.90

2018 1q 17,853 561,284,814 26,081,135 27,358,587 4.9% 3,147,642 51 2,992,528 176 11,537,677 $6.65

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ABSORPTION & DELIVERIES

U.S. VACANCY COMPARISON

U.S. RENTAL RATES COMPARISON

U.S. CAP RATE COMPARISON

0%

1%

2%

3%

4%

5%

6%

7%

2016Q1

2016Q2

2016Q3

2016Q4

2017Q1

2017Q2

2017Q3

2017Q4

2018Q1

2018Q2

2018Q3

2018Q4

2019Q1

Source: CoStar Property®

VACANCY The Industrial vacancy rate in the Houston market area increased to 5.8% at the end of the first quarter 2019. The vacancy rate was 5.6% at the end of the fourth quarter 2018, 5.6% at the end of the third quarter 2018, and 5.4% at the end of the second quarter 2018.

Flex projects reported a vacancy rate of 9.7% at the end of the first quarter 2019, 9.2% at the end of the fourth quarter 2018, 8.9% at the end of the third quarter 2018, and 9.1% at the end of the second quarter 2018.

Warehouse projects reported a vacancy rate of 5.5% at the end of the first quarter 2019, 5.3% at the end of fourth quarter 2018, 5.3% at the end of the third quarter 2018, and 5.1% at the end of the second quarter 2018.

RENTAL RATES According to CoStar, the average quoted asking rental rate for available Industrial space was $7.44 per square foot per year at the end of the first quarter 2019 in the Houston market area. This represented a 1% increase in quoted rental rates from the end of the fourth quarter 2018, when rents were reported at $7.39 per square foot. At the end of the first quarter 2019, Flex rates were $10.04 per square foot, while Warehouse rates stood at $7.05.

ABSORPTIONNet absorption for the overall Houston Industrial market was positive with 2,000,490 square feet in the first quarter 2019 but down from positive 2,416,742 square feet in the fourth quarter 2018. Third quarter 2018 was positive 2,972,855 square feet, and positive 957,709 square feet in the second quarter 2018.

Tenants moving into large blocks of space in 2019 include: Home Depot moving into 770,640 square feet in the Grand National Business Park. Plantgistix moved into 337,040 square feet at 5623 Ameriport Parkway in Baytown and Norlyn Enterprises moved into 134,900 square feet at 9800 Derrington Road.

Positve net absorption was most prominent in the North, Inner Loop, South and Southwest Corridors. New inventory was delivered in the Northwest Corridor which resulted in a negative net absorption.

The Flex building market recorded net absorption of negative 120,275 square feet in the first quarter 2019, compared to negative 136,144 square feet in fourth quarter 2018. Third quarter 2018 was positive 198,2015 while second quarter 2018 was negative 129,603 square feet.

The Warehouse building market recorded net absorption of positive 2,120,765 square feet in the first quarter 2019 compared to positive 2,552,886 square feet in the fourth quarter 2018, positive 2,774,650 in the third quarter 2018, and positive 1,087,312 in the second quarter 2018.

0500,000

1,000,0001,500,0002,000,0002,500,0003,000,0003,500,0004,000,0004,500,0005,000,000

2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1

Houston Metro

Net Absorption Net Completions

Houston United States

The information and details contained herein have been obtained from third-party sources believed to be reliable; however, DFW Lee & Associates, LLC - Houston Office has not independently verified its accuracy. DFW Lee & Associates, LLC - Houston Office makes no representations, guarantees, or express or implied warranties of any kind regarding the accuracy or completeness of the information and details provided herein, including but not limited to the implied warranty of suitability and fitness for a particular purpose. Interested parties should perform their own due diligence regarding the accuracy of the information. The information provided herein, including any sale or lease terms, is being provided subject to errors, omissions, changes of price or conditions, prior sale or lease, and withdrawal without notice, by third-party data source providers. The Houston Industrial Market Report compiles relevant market data by using a third-party database for the proprietary analysis of specific industrial properties in the Houston Area.

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