Q3 2009 Houston Industrial Market Report

HOUSTON

INDUSTRIAL

THIRD QUARTER 2009

Industrial Market HOUSTON MARKET RESEARCH | THIRD QUARTER | 2009

Our Knowledge is your Property

THIRD QUARTER 2009

INDUSTRIAL

HOUSTON

COLLIERS INTERNATIONAL

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HOUSTON

I d Industrial i lM Market k MARKET RESEARCH

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THIRD QUARTER

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2009

Houston Industrial Market Slows as Key Drivers Struggle

MARKET INDICATORS

Q3-08

Q3-09

Quarterly Net Absorption 3.6 Million SF 546,212 SF Overall NNN Rental Rate $5.60 $5 60 psf $5 15 psf $5.15 Overall Vacancy 6.7%

5.4%

Deliveries 735,464 SF

1.2 Million SF

8.0 Million SF

Under Construction 1.7 Million SF

Houston’s industrial market was characterized by an overall slowdown in the third quarter, with occupancy, absorption and rental rates all posting decreases from this time last year. Occupancy continued its downward trend at 93.3%, slipping 130 basis points from 94.6% recorded twelve months earlier. The third quarter also marked the first significant drop in quoted rental rates, coupled with an increase in lease concessions, for all industrial property types. Citywide, net absorption was down on a year-over-year basis, although the major markets reported mixed results. While the Northwest Corridor – Houston’s largest industrial d l market k with h 27% of the h totall inventory – recorded d d year-to-date d negative net absorption at 1.4 million sq. ft., the Southeast and North corridors each posted positive net absorption of 1.6 million sq. ft. and 1.2 million sq. ft., respectively. Despite pockets of market resilience, the prolonged economic uncertainty and weak employment sector weighed heavily on tenants and is expected to continue negatively impacting market fundamentals over the next six to nine months. Decreased activity on the development front has been a welcome sign, preventing what could be additional pressure on occupancy as increased supply hits the market over the next three to six months. At the end of the third quarter, under construction projects totaled 1.7 million sq. ft., compared to 8.0 million sq. ft. underway at this time last year. Overall, Houston’s industrial market continued to be challenged by the increasing local job losses reaching 95,100 or negative 3.6% job growth in the twelve months ending in August 2009. The recent dismal announcements from Houston-based energy and energyrelated l d firms regarding d additional dd l job b cuts and d decreased d d capitall spending d in 2010 do d not bode well for the industrial sector. Industrial growth is not likely over the next year as economies worldwide continue to feel the effects of the deepest recession in recent history and global trade, the manufacturing industry, and volatile energy markets – all primary drivers of the local market – struggle to return to normalcy.

JOB GROWTH & UNEMPLOYMENT ABSORPTION, NEW SUPPLY & VACANCY RATES Aug 08 Aug-08 HOUSTON

Aug 09 Aug-09

-3.6% Job Growth 95,100 jobs lost

Unemployment

5.2%

8.4%

TEXAS

-2.8% Job Growth 295,400 jobs lost

Unemployment

5.3%

8.1%

4 000 000 4,000,000

9%

3,500,000

8%

3,000,000 7%

2,500,000 2,000,000

6%

1,500,000

5%

1,000,000

4%

500 000 500,000

U.S.

-4.4% Job Growth 6,047,000 jobs lost

Unemployment

6.1%

9.6%

3%

0 -500,000

3Q-08

4Q-08 Absorption

1Q-09

2Q-09

New Supply

3Q-08 Vacancy

2%

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COLLIERS INTERNATIONAL

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HOUSTON

2009 INDUSTRIAL LEASES

Ozburn-Hessey Logistics (OHL) Bayport North Distribution Center Jan-09 300,000 SF

Feb-09

United DC Eastport 4 224,511 SF

B&G Foods, Inc.* Northwest Point Distribution Center Feb-09 151,966 SF Cadeco Industries Portwall Distribution Center Jan-09 145,000 SF Integrated Airline Services 10453 Okanella Jan-09 140,000 SF Jacobsen Warehouse Company Bayport North Distribution Center Jul-09 137,500 SF Sharps Compliance Corporation** 2710 Reed Road Feb & May-09 131,406 SF Foxconn Technology Group Centre at Cypress Creek Jan-09 122,547 SF Advance Platinum Solutions* West Little York Distribution Center Mar-09 110,000 SF Overland Distribution Port Crossing Commerce Center Jan-09 103,184 SF Snider Tire ProLogis Northpark Jun-09 101,000 SF *Renewal **Renewal and expansion of 66,035 sq. ft.

INDUSTRIAL

THIRD QUARTER 2009

Occupancy & Availability

Absorption & Demand

Houston s industrial sector recorded Houston’s 93.3% occupancy in the third quarter, 130 basis points below the 94.6% twelve months earlier. To date, industrial occupancy has shifted less than a point from the 93% level for all three quarters, although this relative stability is not expected to last. D Demand d for f industrial i d t i l space has h cooled l d significantly from the robust levels of previous years, and is expected to challenge the market’s ability to sustain occupancy above 90% over the next six to nine months.

Demand for Houston Houston’ss industrial space recorded positive net absorption of 546,212 sq. ft. in the third quarter, up from the previous quarter’s negative net absorption, but still significantly below the 3.6 million sq. ft. of positive net absorption at this time last year. Citywide, the year-to-date positive net absorption reached 896,051 896 051 sq. sq ft., ft compared to 8.2 million sq. ft. of gains in occupied space through the third quarter last year.

Several factors have mitigated the effects ff off the h current economic i downturn. Primary among these has been the disciplined development that was quickly curtailed citywide, particularly in Houston’s major industrial corridors that in recent years have been marked by strong speculative construction. Of the 1.7 million sq. ft. under construction at the end of the third quarter, the largest project is the 1.0- million sq. ft. build-to-suit Roomsto-Go Distribution Center scheduled for completion by year’s end in the Southwest submarket. The remaining projects underway – in their majority speculative – include 450,000 sq. ft. in the Northwest, 163,500 sq. ft. in the North, and 77,000 sq. ft. in the Southwest. The impact from this additional space is expected to be minimal.

Among Houston’s largest industrial corridors, only the Northwest had yearto-date negative net absorption at 1.4 illi sq. ft., f with i h all ll others h i the in h million positive range, albeit well below last year’s levels. The Southeast Corridor posted the strongest year-to-date positive net absorption of 1.6 million sq. ft., followed by the North Corridor with 1.2 million sq. ft. of positive gains. Major tenant move-ins contributing to positive net absorption in the third quarter included Ozburn-Hessey Logistics’ (OHL) 300,000-sq. ft. lease and Warehouse Services’ 200,000-sq. ft. lease both at 4331 Underwood Drive (Southeast); Overland Distribution’s 103,184-sq. ft. lease at 1701 S. 16th Street (Southeast); and Liberty Polymer’s 98,070-sq. ft. lease at 12021250 Harris Street Distribution Center (Inner Loop).

Leasing Rental Rates Houston’s average quoted industrial rental rates continued declining on a year-over-year basis for all property types in the third quarter. Bulk space stood at $4.53 NNN per sq. ft., marking the largest decline (12.0%), followed by warehouse distribution space at $5.20 $5 20 NNN per sq. sq ft. ft (down 8.0%), and flex space $8.10 NNN per sq. ft. (down 4.9%). Until economic conditions improve, rates will likely see further drops over the coming year.

Houston’s industrial leasingg activityy reached 3.2 million sq. ft. in the third quarter, compared to 5.4 million sq. ft. recorded in the same quarter last year. A prevailing sense of uncertainty regarding the long-term economic outlook, and in particular the duration of the current recession affecting almost all major global markets, continued to dampen leasing activity in Houston’s industrial sector. For the top industrial lease transactions signed year-to-date, please see the column at left. COLLIERS INTERNATIONAL

2

THIRD QUARTER 2009

INDUSTRIAL

HOUSTON

Sales Activity

Houston Industrial Investment Sales Y Year-to-date d 2009 Total volume:

$813.2 (in millions)

# of properties:

117

Total Sq. Ft.:

11,993,764

Price/Sq. Ft.:

$84

Average Cap:

10.6% Source: Costar Comps

Claypoint Industrial Park, 8830 Clay Road Northwest Corridor

Houston industrial investment sales activity remained d anemic through h h the h third quarter with the majority of property sales in the last three months falling in the less than 50,000-sq. ft. range (among the few exceptions are the properties listed below). Year-to-date sales volume reached $813.2 million with a combined total of 12 million sq. ft. and an $84 price per sq. ft. average.

Northstar Commercial Partners acquired i d the h 369,364-sq. 369 364 f Sugar ft. S L d Land Corporate Center located at 1601 Gillingham Lane for $15.7 million or $43 per sq. ft. from Amegy Bank of Texas. Prior to being foreclosed by Amegy, the 2005 built property was the new headquarters for the now in bankruptcy Houston-based Fingers Furniture.

YHR Partners I (Spec’s Wines, Spirits and Finer Foods) acquired the 200,850sq. ft. Claypoint Industrial Park located at 8830 Clay Road in the Northwest Corridor from Weingarten Realty for approximately $11 million or $55 per sq. ft. Spec’s will be fully occupying the previously vacant warehouse completed in 2008.

Among the largest industrial portfolio transactions in the third quarter, Aeroterm U.S. acquired 27 properties with a combined 1.2 million sq. ft. for $150.4 million or $121 per sq. ft. from YRC Worldwide. Included in the sale leaseback was the 60,239-sq. ft. truck terminal located at 9415 Wallisville in the Southeast industrial corridor.

HOUSTON INDUSTRIAL MARKET SUMMARY

Market

Greater Houston Total

Rentable Area

475,874,113

Direct Vacancy V Rate

Di Direct t Vacant SF

30,983,592

6.5%

Sublet Vacancy V Rate

S bl t Sublet Vacant SF

1,018,306

0.2%

T t l Total

Vacant V t SF

32,001,898

Total Vacancy V Rate

6.7%

3 d Qt 3rd Qtr Net N t Absorption

YTD Net N t Absorption

546,212

896,051

3 d Qtr 3rd Qt Completions

YTD Completions

SF Under U d Construction

735,464

6,360,799

1,720,513

NW Inner Loop

12,797,075

832,784

6.5%

-

0.0%

832,784

6.5%

(13,412)

(243,737)

-

-

-

CBD

34,863,853

2,015,611

5.8%

-

0.0%

2,015,611

5.8%

10,225

(313,957)

-

-

-

North Inner Loop

5,836,337

387,480

6.6%

-

0.0%

387,480

6.6%

-

(90,023)

-

-

-

SW Inner Loop

9,856,007

450,662

4.6%

13,164

0.1%

463,826

4.7%

36,960

(182,647)

-

-

-

Total Inner Loop

63,353,272

3,686,537

5.8%

13,164

0.0%

3,699,701

5.8%

33,773

(830,364)

-

-

-

North Fwy/Tomball Pky

14,277,547

1,338,233

9.4%

6,475

0.0%

1,344,708

9.4%

31,083

North Hardy Toll Rd

21,817,249

2,302,452

10.6%

179,926

0.8%

2,482,378

11.4%

(57,512)

N th O North Outer t Loop L

17 004 501 17,004,501

1 143 125 1,143,125

6 7% 6.7%

-

0 0% 0.0%

1 143 125 1,143,125

6 7% 6.7%

31 626 31,626

The Woodlands/Conroe

12,863,853

567,504

4.4%

6,690

0.1%

574,194

4.5%

117,028

5,351,314

8.1%

193,091

0.3%

5,544,405

8.4%

122,225

Total North Corridor

65,963,150

Northeast Hwy 321

1,166,135

4,200

0.4%

-

0.0%

4,200

0.4%

Northeast Hwy 90

16,122,206

410,892

2.5%

-

0.0%

410,892

2.5%

Northeast I-10

0

186,164

49,950

91,200

-

1,056,491

486,720

1,009,510

96,250

111 230 111,230

-

122 227 122,227

67 250 67,250

(181,632)

-

50,000

-

1,272,937

163,500

1,172,253

536,670

(2,900)

-

-

-

(127,731)

(201,431)

-

-

30,000 -

3,901,934

-

0.0%

-

0.0%

-

0.0%

28,850

65,705

-

-

Northeast Inner Loop

10,993,362

561,297

5.1%

51,300

0.5%

612,597

5.6%

246,223

1,144

-

-

-

Total Northeast Corridor

32,183,637

976,389

3.0%

51,300

0.2%

1,027,689

3.2%

147,342

(137,482)

-

-

30,000

Hwy 290/Tomball Pky

15,533,927

1,053,157

6.8%

11,374

0.1%

1,064,531

6.9%

(290,436)

(189,875)

-

-

100,000

4,114,541

315,859

7.7%

-

0.0%

315,859

7.7%

(38,095)

-

-

200,000

60,126,754 , ,

3,930,281 , ,

6.5%

184,903 ,

0.3%

4,115,184 , ,

6.8%

((291,433) , )

((847,854) , )

-

307,723 ,

150,000 ,

NW Near

16,080,723

966,248

6.0%

57,055

0.4%

1,023,303

6.4%

88,075

(73,607)

-

314,068

-

NW Outlier

11,174,632

624,037

5.6%

20,113

0.2%

644,150

5.8%

1,636

79,722

-

133,605

-

West Outer Loop

21,031,676

1,851,199

8.8%

109,208

0.5%

1,960,407

9.3%

(154,431)

(372,570)

165,044

697,476

-

128,062,253

8,740,781

6.8%

382,653

0.3%

9,123,434

7.1%

(645,053)

(1,442,279)

165,044

1,452,872

450,000

NW Hwy 6 p NW Inner Loop

Total Northwest Corridor

1,536

East I-10 Outer Loop

14,736,129

278,960

1.9%

10,578

0.1%

289,538

2.0%

13,872

59,134

-

-

-

East-SE Far

43,498,511

5,147,154

11.8%

75,629

0.2%

5,222,783

12.0%

414,385

1,394,422

33,750

2,063,508

-

SE Outer Loop

21,347,855

483,726

2.3%

-

0.0%

483,726

2.3%

(22,230)

Total Southeast Corridor

79,582,495

5,909,840

7.4%

86,207

0.1%

5,996,047

7.5%

406,027

161,871

-

-

-

1,615,427

33,750

2,063,508

-

South Hwy 35

29,210,026

1,199,278

4.1%

-

0.0%

1,199,278

4.1%

128,108

S Inner Loop

14,071,286

599,058

4.3%

12,185

0.1%

611,243

4.3%

(147,449)

(3,586)

-

320,071

-

(152,560)

-

-

Total South Corridor

43,281,312

1,798,336

4.2%

12,185

0.0%

1,810,521

4.2%

(19,341)

-

(156,146)

-

320,071

-

Hwy 59/Hwy 90

20,824,566

1,722,203

8.3%

8,771

0.0%

1,730,974

8.3%

Southwest Far

10,078,818

628,670

6.2%

53,268

0.5%

681,938

6.8%

91,437

143,697

-

716,757

-

391,048

488,670

-

534,654

Southwest Outer Loop

15,124,585

1,210,402

8.0%

15,100

0.1%

1,225,502

8.1%

-

(57,462)

(69,088)

-

-

Sugar Land

17,420,025

959,120

5.5%

202,567

1.2%

1,161,687

-

6.7%

76,216

111,363

-

-

1,077,013

Total Southwest Corridor

63,447,994

4,520,395

7.1%

279,706

0.4%

4,800,101

7.6%

501,239

674,642

-

1,251,411

1,077,013

COLLIERS INTERNATIONAL

3

THIRD QUARTER 2009

INDUSTRIAL

HOUSTON

SELECT INDUSTRIAL PROJECTS UNDER CONSTRUCTION Submarket

Building Park

Building Name

Building Address

Sugar Land

Rooms To Go Distribution Center

I-10

Northwest Inner Loop

TAM International

RBA

% Leased

Developer Name

Estimated Delivery

1,000,000

100

Rooms To Go, Inc

Dec-09

6909 US 290

150,000

100

TAM International

Dec-09

Northwest Hwy 6

Hempstead 1960 Business Park

20220 Hempstead Industrial WH

20220 Hempstead Rd

130,000

0

Capital RE Commercial

Nov-09

Hwy 290/Tomball Pkwy

Beltway 249 Business Park

15825 Tomball Pkwy Flex Bldg.

15825 Tomball Parkway

100,000

35

Capital RE Commercial

Dec-09

North Hardy Toll Road

AMB IAH Logistics Center III

Forward Air BTS

19220 Kenswick Dr

96,250

100

AMB Property Corp.

Jan-10

Northwest Hwy 6

Tomball Parkway Business Center

22955 Tomball Pkwy Industrial WH

22955 Tomball Pkwy

70,000

0

Capital RE Commercial

Sep-09

North Outer Loop

16827 W. Hardy Industrial WH

16827 W. Hardy

67,250

0

The National Realty Group

Dec-09

Sugar Land

522 Gillingham Indusrial WH

522 Gillingham Ln

57,013

100

City of Sugar Land

Oct-09

Northeast Hwy 90

14418 Smith Industrial WH

14418 Smith Rd

30,000

0

Capital RE Commercial

Nov-09

Stoney Creek Center, Bldgs. C & E

1420 Katy Flewellen Rd

20,000

0

Lionheart Commercial Development

Jun-10

Sugar Land

Stoney Creek Center

Total under construction industrial projects listed above

1,720,513

Grand total under construction (including industrial projects over 10,000 sq. ft.)

1,720,513

SELECT INDUSTRIAL DELIVERIES YEAR-TO-DATE 2009 Submarket

Building Park

Building Name

Building Address

East-Southeast Far Ind

Interport Business Park

Interport II

13031 Bay Area Blvd

734,448

0

Underwood II

359 Old Underwood Rd

710,000

90.14

East-Southeast Far Ind

RBA

% Leased

Developer

Delivery Date

First Industrial Realty Trust

Jan-09

Clay Development & Construction, Inc.

Jan-09

Koll Development Company

May-09

Simpkins Group

Feb-09

Panattoni Development

Oct-09

Avera e a Co Companies pa es

Feb-09 eb 09

Pinpoint Commercial LP

Jun-09

Warehouse Associates

Mar-09

Thakeray and Chief Partners

Jan-09

Transwestern

Jan-09

East-Southeast Far Ind

Ellington Trade Center Phase I

Ellington Trade Center, Bldgs. A,B,D

12556 Highway 3

513,800

0

North Hardy Toll Road Ind

Hardy Distribution Center

Walgreens Distribution Center

1805 Greens Rd

500,290

100

North Hardy Toll Road Ind

Airtex Industrial Center

Airtex Industrial Center

14500 North Fwy

486,720

0

59/Hwyy 90 ((Alt)) Indd Hwyy 59/

Freeport eepo Ninety e y Business us ess Park a

Freeport eepo Ninety e y BP,, 5 Bldgs. dgs

13843 38 3 N Promenade o e ade Blvdd

3349,177 9,

45.00 5 00

West Outer Loop Ind

Satsuma Station Industrial Park

Satsuma Distribution Center 1

9020 Jackrabbit Rd

315,120

0

Southwest Far Ind

Corporate Centre Kirby

Corporate Centre Kirby, III & IV

9240-9360 Kirby Dr

293,695

52.00

Hwy 59/Hwy 90 (Alt) Ind

Beltway Crossing

Beltway Crossing, Bldgs. 1 & 2

13323 S Gessner

282,880

0

South Hwy 35 Ind

Park 288

Park 288, 3 Bldgs.

2710-2730 Reed Rd

269,331

49.00

Northwest Near Ind

Guhn Road Distribution Center

Guhn Road Distribution Center

6535 Guhn Rd

253,838

0

EastGroup Properties

Feb-09

Southwest Far Ind

Lakeview Business Park

Lakeview Business Park, 3 Bldgs.

14511, 14623 Fairway Pines Dr

240,959

0

Trammell Crow Company

Mar-09

East-Southeast Far Ind

Ellington Trade Center Phase I

Ellington Trade Center, 2 Bldgs.

12552-12554 Highway 3

229,500

0

Koll Development Company

Jun-09

West Outer Loop Ind

Port North West

Port North West, 2 Bldgs.

7200 Golden Gate Dr

153,044

0

Transwestern

Sep-09

South Hwy 35 Ind

Park 288

Park 288, 2 Bldgs.

2720-2730 Reed Rd

137,925

0

Transwestern

Jan-09

Northwest Outliers Ind

ECP Building

17400 Park Row

118,005

100

Sercel

Jun-09

West Outer Loop Ind

Beltway Crossing Building 7

10803 Vinecrest Dr

95,112

49.47

EastGroup Properties

Jan-09

North Outer Loop Ind

World Houston 30

5656 N Sam Houston Pky E

88,000

48.86

EastGroup Properties

Jun-09

Campbell Road Industrial, 6 Bldgs.

5603-5621 Campbell Road

76,000

29.00

First Houston Properties

Mar-09

Northwest Corridor Ind

Northwest Inner Loop Ind

Total Year-to-date Industrial Deliveries listed above

5,847,844

Grand total year-to-date industrial deliveries (including deliveries less than 75,000 sq. ft.)

6,360,799

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THIRD QUARTER 2009

INDUSTRIAL

HOUSTON

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61 Countries on 6 Continents

64 Asia/Pacific 97 Europe/Middle East/Africa

NORTH AMERICA AFRICA

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$1.6 Billion in Global Revenue

HAWAII

1.1 Billion Square Feet under Management

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HOUSTON

INDUSTRIAL

THIRD QUARTER 2009

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