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Houston’s Industrial Real Estate Outlook

I got to keynote the 2015 Commercial Real Estate Forecast Competition for the Houston CCIM chapter this month. There were lots of numbers flying through the room, with some of the best brokers in town sharing their expertise. Here are some of the comments I heard regarding industrial space in the Houston market.

We are likely to see eight million square feet of new industrial space come into the market in 2015. Absorption is expected to be between 4.5 and 6.0 million, so the occupancy rate is expected to decline. Look for more concessions this year and possibly some decline in asking rental rates. New product will be developed in all quadrants of the city, but the vacancy rate in the northwest sector is currently at an all-time low.

Occupancy rates for dock-high warehouses are forecast to be a healthy 93 to 95 percent by the end of the year.

Oil pipe yards and other energy services companies have been hit hard. But higher levels of construction and growth in the petrochemical business is still creating a need for warehouse and industrial space. Bulk distribution is the healthiest segment in the sector. Bayport, the Houston Ship Channel and the east side of Houston should continue to do well in 2015.

Land prices have skyrocketed virtually out of sight. Some land has been selling for $5 per square foot. At this price, very few real estate development deals make sense. Expect to see some downward pressure on land values throughout the metro area.

New development funding has virtually dried up. But stabilized buildings still have plenty of bidders. Foreign capital was buying a lot of real estate in Houston last year. One advisor told me he sold an entire city block to buyers from Eastern Europe. Cap rates on Class-A properties have dropped to the 5 to 5.5 percent range. Class-B and -C buildings are yielding 7 and 8 percent respectively.

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