Energy Sector Decline Leads Houston Industrial Market Downward

With a thriving energy sector, Houston’s industrial market remained strong in the first three quarters of 2008, but dropped in the fourth quarter as the price of oil signaled the downward movement of the oil industry, according to a CB Richard Ellis Inc. report. The Houston office of CBRE posted a 6.3 percent increase in vacancy along with an increase in lease rates from the previous quarter. Nationwide financing constraints reduced investment activity and devalued most of the major publicly traded industrial REITs. User-demand changed from buying to leasing while build-to-suit activity saw a decline and speculative buildings will all but cease, in the first half of 2009, according to CBRE figures. “Houston has been relatively insulated from the rest of the country in recent years, but that trend will likely come to an end in 2009,” said Ariel Guerrero, client services manager with Grubb & Ellis Co. “Houston area manufacturers have seen a boom in activity thanks to the robust domestic and international demand for oil exploration equipment. However, all signs point to a slowdown in this sector as the global and national economic problems have trickled down into the local economy, which will cause job growth to slow dramatically in 2009.” According to the latest report from the National Association of Purchasing Management-Houston, the Houston Purchasing Managers Index, a leading indicator of regional production, slipped into negative territory in November for the first time since December 2003, indicating that production here is likely to contract over the next three to four months, according to a Grubb & Ellis fourth quarter report. Houston’s industrial leasing market weathered the national economic crisis by posting another solid year of growth in 2008. Strong demand driven from the oil and gas services sector further solidified Houston’s status as one of the top markets nationwide. Despite healthy annual absorption gains last year, Houston did witness a slowdown in leasing velocity compared to levels seen over the past four years, according to Grubb & Ellis. Leading the charge, the warehouse/distribution sector registered the largest annual absorption gain with companies such as Home Depot, Wilson Industries, Palmer Logistics, Frontier Logistics and Georgia Gulf Chemicals all inking sizable deals. High energy prices, a strong local economy and the expansion of the Port of Houston helped take Houston’s industrial market into an expansion phase, as developers brought an additional 10 million square feet of new product online in 2008. This comes on the heels of over 9 million square feet added to the inventory in 2007. However, the surge of new projects coming online coupled with a slight drop in leasing demand has caused vacancy to edge up in 2008, a trend that is likely to continue throughout 2009, Grubb & Ellis said. In the year ahead, the challenge for Houston’s industrial market will be tied to the rapid expansion of the inventory as leasing velocity slows, which will cause overall vacancy to further increase, especially in areas where construction activity has been moving at a break-neck speed such as the East Southeast Far and Northwest Far submarkets. Guerrero said. “This will lead to many of the new projects to sit with large blocks of vacant space, leaving ample opportunities for tenants. Landlords will battle for long-term, credit-worthy tenants as economic uncertainty will diminish tenants’ willingness to commit to new projects,” he said. “In turn, owners will be forced to be more creative in their deal making, leading to increased concession packages in 2009 to attract tenants. On the bright side, construction announcements have begun to subside which will allow the market to recover quicker and avoid an over-built scenario as the ongoing credit crisis has made it difficult for developers to obtain financing for new developments.” Guerrero said this will allow the opportunity for Houston’s industrial market to regain its footing with the equilibrium between supply and demand reaching a healthy balance by late 2009 or 2010.