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Houston’s industrial market ends 2016 on a positive note

Research & Forecast Report

HOUSTON | INDUSTRIALQ4 2016

Lisa Bridges Director of Market Research | Houston

During the final quarter of 2016, 1.9M SF of Houston’s industrial inventory was absorbed, substantially less than the 6.3M SF absorbed in the third quarter. However, 3.9M SF of the space that was absorbed in the previous quarter was a result of one tenant, Daiken occupying a massive new facility. Industrial leasing activity decreased between quarters, dropping from 4.3M SF to 3.2M SF.

The average vacancy rate increased 10 basis points over the quarter from 5.5% in to 5.6%. About 70% of the 2.3M SF of new space delivered in Q4 2016 was pre-leased and 78% of the 5.2M SF currently under construction is pre-leased. More than 2.4M SF of the 5.2M SF currently under construction is located in the East-Southeast Far submarket where the Houston’s Ship Channel and the Port of Houston are located.

The average citywide quoted industrial rental rate increased 3.3% on a quarterly basis from $6.87 per SF NNN to $7.10 per SF NNN.

According to the U.S. Bureau of Labor Statistics, the Houston metropolitan area created 13,400 jobs (not seasonally adjusted) between October 2015 and October 2016. Most of the job growth occurred in government, retail trade, education and healthcare, trade, transportation and utilities, and professional services.

Summary Statistics Houston Industrial Market Q4 2015 Q3 2016 Q4 2016

Vacancy Rate 5.0% 5.5% 5.6%

Net Absorption (SF)(Million Square Feet) 0.7M 6.3M 1.9M

New Construction (SF)(Million Square Feet) 1.8M 6.5M 2.3M

Under Construction (SF)(Million Square Feet) 8.8M 7.4M 5.2M

Asking Rents Per Square Foot Per Year

Average $7.05 $6.87 $7.10

Warehouse/Distribution $6.57 $6.66 $6.78

Flex/Service $12.39 $11.56 $11.44

Tech/R&D $13.00 $11.94 $12.69

Market IndicatorsRelative to prior period

AnnualChange

Quarterly Change

Quarterly Forecast*

VACANCY

NET ABSORPTION

NEW CONSTRUCTION

UNDER CONSTRUCTION

*Projected

Colliers International represented a private investor in the acquisition of a 56,500-SF crane served warehouse located at 7922 Hansen Road in the Southeast submarket. The building is situated on 4.46 acres. The price was not disclosed.

7922 Hansen Rd

Century Plaza Distribution Center

Sales Transactions

According to Real Capital Analytics, Exeter Property Group purchased a 149,760-SF distribution warehouse from Weeks Robinson Properties for $7.8M or $52 per SF. The building is located in the Century Plaza business park in the North Hardy Toll Rd submarket.

2 Houston Research & Forecast Report | Q4 2016 | Industrial | Colliers International

Sales ActivitySource: Real Capital Analytics

Q4 2016

NO. OF PROPERTIES: 41

TOTAL SF: 3.5M

AVERAGE $/SF: $71

AVERAGE CAP RATE: N/A

Job Growth & Unemployment(not seasonally adjusted)

UNEMPLOYMENT 10/15 10/16

HOUSTON 4.8% 4.9%

TEXAS 4.4% 4.2%

U.S. 4.8% 4.4%

JOB GROWTHAnnual Change

# of Jobs Added

HOUSTON 0.4% 13.4K

TEXAS 1.8% 212.6K

U.S. 1.6% 2.3M

Vacancy & Availability

Houston’s average industrial vacancy rate increased from 5.5% to 5.6% over the quarter and increased by 60 basis points over the year from 5.0% in Q4 2015. At the end of the fourth quarter, Houston had 28.6M SF of vacant industrial space for direct lease and an additional 1.6M SF of vacant sublease space. Among the major industrial corridors, the Northeast Corridor has the lowest vacancy rate at 2.7%, followed by the South at 3.5%, and then the Northwest and Southeast Corridor both at 5.2%. The largest percentage of vacant space is located in the North Corridor which has a 9.0% vacancy rate.

Houston’s industrial construction pipeline had 5.2M SF of projects underway at the end of the fourth quarter. 32.7% of this space is spec development and is not pre-leased. The largest project under construction is the 800,000-SF build-to-suit FedEx distribution center located on the newly opened Grand Parkway in northwest Harris County. A partial list of buildings currently under construction can be found on page 3 of this report.

Absorption & Demand

Houston’s industrial market posted 1.9M SF of positive net absorption in the fourth quarter, with the Southeast Corridor submarket contributing the largest share at 1.3M SF, followed by the Northwest Corridor which posted 0.9M SF of absorption. The Southwest Corridor followed with 105,522 SF of absorption. The remaining submarkets posted negative net absorption; the largest amount was in the Inner Loop Corridor which added 199,426 SF to the market availability.

There were several major tenant move-ins contributing to net absorption gains in the fourth quarter including IKEA (495,460 SF), XPO Logistics (115,300 SF) and Air Liquide (83,000 SF), all in the East-Southeast submarket.

Rental Rates

According to CoStar, our data service provider, Houston’s citywide average quoted industrial rental rate for all product types increased over the quarter from $6.87 per SF NNN to $7.10 per SF NNN. According to Colliers’ internal data, actual lease transactions are in the $4.56 – $5.04 per SF NNN range for newer bulk industrial spaces, while flex rates range from $7.20 to $10.80 per SF depending on the existing improvements or the allowance provided for tenant improvements, and the location of the property.

According to CoStar, the average quoted NNN rental rates by property type are as follows: $6.78 per SF for Warehouse Distribution space; $11.44 per SF for Flex/Service space; with Tech/R&D space averaging $12.69 per SF.

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

$4.00

$5.00

$6.00

$7.00

$8.00

Industrial Rental Rate and Vacancy Percentage Houston, TX

Avg. Rent Avg. Vacancy

*Vacancy percentage includes direct and sublease space.

3 Houston Research & Forecast Report | Q4 2016 | Industrial | Colliers International33

Q4 2016 Industrial Lease Transactions over 50,000 SFBUILDING NAME/ADDRESS SUBMARKET SF TENANT LEASE DATE

Underwood 2 East-Southeast Far 78,400 Pacorini Global Services1 Oct-16

McCarty Business Park Northeast Inner Loop 75,540 Adams Warehouse & Delivery Inc Oct-16

27260 Oakridge Park Dr Woodland/Conroe 66,875 Consolidated Pressure Control2 Dec-16

Portwall Distribution Center I East-Southeast Far 65,000 Kuriyama of America, Inc.1 Oct-16

Airtex Distribution Center North Fwy/Tomball Pky 59,854 Amerasia Shipping Logistics Dec-16

Point North Cargo Park North Hardy Toll Road 54,288 MVP Logistics, LLC1 Dec-16

620 N Houston Ave Northeast Hwy 90 52,145 Gateway Supply, Inc. Oct-16

Leasing ActivityHouston’s industrial leasing activity decreased 25.7% over the quarter from 4.3M SF in Q3 2016 to 3.2M SF. The table below highlights some of the larger transactions that occurred in Q4 2016.

1Colliers International Transaction2Renewal

Under Construction - 100,000 SF or greaterQ4 2016 Industrial Under Construction - 200,000 SF or greater

BUSINESS PARK/ADDRESS SUBMARKET RBA % LEASED DEVELOPER/CONTRACTOR DELIVERY DATE BUILDING DESCRIPTION

8787 W Grand Pky N Northwest Outlier 800,000 100% Unknown Aug-17 BTS for FedEx

Cedar Port Distribution ParkBorusan Rd

East-Southeast Far 501,020 100% Clay Development Jan-17 Distribution Ikea

Cedar Port Distribution ParkBorusan Rd

East-Southeast Far 495,462 100% Clay Development Jan-17 Distribution Ikea

Ameriport Industrial Park5000 Ameriport Pky

East-Southeast Far 458,280 65% National Property Holdings Jan-17 Spec Warehouse

Ameriport Industrial Park717 Logistics Dr

East-Southeast Far 327,600 100% National Property Holdings Jan-17 BTS

Carson Bayport 3 - Bldg I-34111 Malone Dr

East-Southeast Far 231,983 0% Carson Companies Feb-17 Spec Warehouse

3730 S Main St South Hwy 35 210,000 100% American Commercial Contractors

Mar-17 BTS for FloWorks International

Beltway Southwest Business Park

Southwest Far 175,000 100% Hines Securities, Inc. Jan-17 BTS for Homelegance, Inc.

Beltway SW Business Park 4 Southwest Far 112,500 0% Hines Securities, Inc. Jun-17 Spec Distribution

500 Cane Island Pky Northwest Outliers 110,000 100% Pepperl+Fuchs Apr-17 BTS for Pepperl+Fuchs

Carson Bayport 3 - Bldg I-14033 Malone Dr

East-Southeast Far 107,291 0% Carson Co Feb-17 Spec Warehouse

4 Houston Research & Forecast Report | Q4 2016 | Industrial | Colliers International

Q4 2016 Houston Industrial Market Statistical Summary

MARKET RENTABLE AREA

DIRECT VACANT SF

DIRECT VACANCY

RATE

SUBLET VACANT

SF

SUBLET VACANCY

RATE

TOTAL VACANT SF

TOTAL VACANCY

RATE

4Q16 NET ABSORP-

TION

3Q16 NET ABSORP-

TION

4Q16 COMPLE-

TIONS

3Q16 COMPLE-

TIONS

SF UNDER CONSTRUC-

TION

Houston Total 534,962,373 28,560,094 5.3% 1,606,204 0.3% 30,166,298 5.6% 1,922,506 6,256,991 2,289,618 6,457,541 5,236,409

CBD-NW Inner Loop 11,571,221 481,011 4.2% 102,171 0.9% 583,182 5.0% (66,612) 9,375 - - -

Downtown 31,092,481 1,957,552 6.3% 81,063 0.3% 2,038,615 6.6% (111,678) (92,768) - - - North Inner Loop 4,834,607 259,905 5.4% - 0.0% 259,905 5.4% (9,300) 23,600 - - - Southwest Inner Loop

7,332,623 13,586 0.2% - 0.0% 13,586 0.2% (11,836) 2,676 - - -

INNER LOOP CORRIDOR TOTAL

54,830,932 2,712,054 4.9% 183,234 0.3% 2,895,288 5.3% (199,426) (57,117) - - -

North Fwy/Tomball Pky

21,924,032 2,675,019 12.2% 30,916 0.1% 2,705,935 12.3% (4,270) 208,794 50,000 99,875 129,500

North Hardy Toll Rd 33,246,722 3,453,440 10.4% 145,704 0.4% 3,599,144 10.8% 73,742 25,158 33,075 - 19,700 North Outer Loop 19,714,669 973,811 4.9% 65,920 0.3% 1,039,731 5.3% (22,865) 59,409 - - 35,000 The Woodlands/Conroe

16,912,560 900,958 5.3% 8,100 0.0% 909,058 5.4% (54,910) 286,160 11,875 285,000 20,250

NORTH CORRIDOR TOTAL

91,797,983 8,003,228 8.7% 250,640 0.3% 8,253,868 9.0% (8,303) 579,521 94,950 384,875 204,450

Northeast Hwy 321 1,298,073 4,700 0.4% - 0.0% 4,700 0.4% 33,000 (4,700) - - - Northeast Hwy 90 17,558,159 204,930 1.2% - 0.0% 204,930 1.2% (27,055) 17,730 - 10,175 20,222 Northeast I-10 3,860,085 85,877 2.2% - 0.0% 85,877 2.2% (28,689) 13,891 - - - Northeast Inner Loop 11,375,801 513,575 4.5% 98,031 0.9% 611,606 5.4% (64,728) (110,077) - - - NORTHEAST CORRIDOR TOTAL

34,092,118 809,082 2.4% 98,031 0.3% 907,113 2.7% (87,472) (83,156) - 10,175 20,222

Hwy 290/Tomball Pky

20,262,237 1,701,254 8.4% 309,569 1.5% 2,010,823 9.9% 680,407 445,805 - 28,041 228,250

Northwest Hwy 6 9,139,604 215,247 2.4% - 0.0% 215,247 2.4% (2,154) 3,918,098 - 3,924,010 20,250 Northwest Inner Loop

60,120,666 1,977,651 3.3% 243,002 0.4% 2,220,653 3.7% 8,888 (186,529) - - -

Northwest Near 17,856,587 812,214 4.5% - 0.0% 812,214 4.5% 80,405 14,694 - - -

Northwest Outlier 19,276,979 1,487,547 7.7% 30,725 0.2% 1,518,272 7.9% 108,546 (41,474) 62,340 20,040 992,000 West Outer Loop 25,006,357 973,246 3.9% 131,451 0.5% 1,104,697 4.4% 27,322 (140,863) - 40,000 133,600 NORTHWEST CORRIDOR TOTAL

151,662,430 7,167,159 4.7% 714,747 0.5% 7,881,906 5.2% 903,414 4,009,731 62,340 4,012,091 1,374,100

South Highway 35 33,710,763 1,077,608 3.2% - 0.0% 1,077,608 3.2% 913 36,841 108,000 - 274,800 South Inner Loop 12,316,107 516,570 4.2% - 0.0% 516,570 4.2% (70,812) (58,356) - - - SOUTH CORRIDOR TOTAL

46,026,870 1,594,178 3.5% - 0.0% 1,594,178 3.5% (69,899) (21,515) 108,000 - 274,800

East I-10 Outer Loop 13,525,359 53,610 0.4% - 0.0% 53,610 0.4% (18,310) (3,000) - - - East-Southeast Far 57,318,869 4,013,761 7.0% - 0.0% 4,013,761 7.0% 1,469,386 1,611,554 1,638,877 1,409,100 2,468,970 Southeast Outer Loop

17,135,400 365,232 2.1% 125,000 0.7% 490,232 2.9% (172,406) (105,377) - - -

SOUTHEAST CORRIDOR TOTAL

87,979,628 4,432,603 5.0% 125,000 0.1% 4,557,603 5.2% 1,278,670 1,503,177 1,638,877 1,409,100 2,468,970

Highway 59/Highway 90

22,393,264 1,670,782 7.5% 161,452 0.7% 1,832,234 8.2% (116,150) 9,275 50,000 25,000 351,960

Southwest Far 12,086,616 1,205,498 10.0% 60,500 0.5% 1,265,998 10.5% 287,461 106,851 309,000 576,550 523,907 Southwest Outer Loop

13,206,073 429,646 3.3% 7,400 0.1% 437,046 3.3% 7,270 138,966 - - -

Sugar Land/Ft Bend Co

20,886,459 535,864 2.6% 5,200 0.0% 541,064 2.6% (73,059) 71,258 26,451 39,750 18,000

SOUTHWEST CORRIDOR TOTAL

68,572,412 3,841,790 5.6% 234,552 0.3% 4,076,342 5.9% 105,522 326,350 385,451 641,300 893,867

Market Summary

Did you know?

The Port of Houston leads the Nation in break bulk cargo and is ranked #1 in US port foreign tonnage?

5 North American Research & Forecast Report | Q4 2014 | Office Market Outlook | Colliers International

Copyright © 2015 Colliers International.The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

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5 North American Research & Forecast Report | Q4 2014 | Office Market Outlook | Colliers International

Copyright © 2015 Colliers International.The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

Colliers International | Houston1233 West Loop South, Suite 900 Houston, Texas 77027+1 713 222 2111colliers.com/texas/houston

FOR MORE INFORMATIONLisa BridgesDirector of Market Research | Houston+1 713 830 2125lisa.bridges@colliers.com

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