As COVID-19 spread across the country, real estate markets across the country have been affected in various ways. However, the industrial asset class seems to endure despite the challenges that the COVID-19 recession has brought forth. Much of this is due to the industrial market’s strong position heading into the pandemic.
Real Estate Fundamentals
The industrial real estate market in Houston was healthy heading into the pandemic. New leasing in 2019 totaled 31 msf, up 49.5% over 2018 levels. Demand was driven primarily by e-commerce and the need for large warehouse/distribution facilities. Since 2015, demand began outpacing supply in the market, with vacancy rates remaining under 6.0% for eight straight quarters. Vacancy entering COVID-19 was 190 bps higher than it was entering the Great Financial Crisis (GFC) due to the recent demand for new development and the delivery of 43.2 msf of industrial product since 2018, of which 42.9% is currently vacant.
What’s Different This Time?
This past industrial market cycle has been driven by e-commerce and the ability for consumers to order, purchase, and receive goods and services online. Increased supply chain efficiency has driven demand for large warehouse/distribution facilities. While the pre-GFC was driven by transportation and wholesale trade, pre-COVID-19 has been driven by retail trade. When compared to the pre-GFC retail trade reported a 256.0% increase in leasing activity. Online orders with rapid delivery will continue to drive demand for larger and more modern warehouse/distribution facilities in Houston.
What to Watch
A variety of factors have the potential to impact Houston’s industrial market. On one hand, increasing vacancy due to a strong redevelopment pipeline and a drop in tenant demand or resurgence of COVID-19 may potentially slow recovery. On the other, the growth in e-commerce will lead to additional demand for warehouse storage, and we expect to see a balance in supply and demand.
For more, read our “Industrial: The Recession Proof Asset Class?” report.