Houston Industrial Market Conditions Q1 2023
The Houston industrial market experienced healthy conditions in Q1 2023. There were 6.6 million square feet of deliveries, with a preleased rate of 56.4%. The majority of deliveries broke ground speculatively and gained strong traction in lease-up prior to delivery. The vacancy rate slightly increased to 6.0%, but it remains below the five-year average of 6.8%. The Southeast submarket has the tightest vacancy rate at 4.4%.
Leasing activity was robust, with 8.1 million square feet of deals signed in Q1. Construction and building materials, logistics and distribution, and retail industries dominated the leasing volume. Several deals are in the proposal stage or nearing lease execution, indicating continued momentum in the next quarter.
Construction activity reached 30.5 million square feet, including eight mega-box projects over one million square feet in size. The demand for first-generation product prompted 27.8% of the under-construction inventory to be preleased. The North submarket had the largest share of the pipeline with 6.2 million square feet underway, followed by the Northwest with 5.9 million square feet.
The outlook for the Houston industrial market is positive, with continued demand from companies across diverse industries. Although there may be some delays in deals due to macroeconomic headwinds, it is not expected to persist in the long term. The traction and velocity in newer product will drive industrial dynamics throughout 2023.
In terms of fundamentals, Q1 net absorption was 5,480,687 square feet, and the total vacancy rate was 6.0%. The sublease vacancy was 2,430,231 square feet. The direct asking rent increased to $0.56 per square foot, while the sublease asking rent increased to $0.50 per square foot. Concessions remained stable. The quarterly absorption remained strong, indicating continued positive momentum. The vacancy rate remained relatively stable, increasing slightly from the previous quarter. Developers are keeping up with demand by staying the course in construction activity.
Overall, the Houston industrial market is resilient, with strong demand and a balanced supply-demand dynamic. The market is expected to see notable absorption in the upcoming quarters, driven by strong tenant demand and the significant amount of construction underway. The West Houston submarket has shown significant development and is positioned for further growth. The market is also benefiting from infrastructural improvements and the expansion of the Port of Houston.