Q4 2022 HOU Industrial Market Report

HOUSTON INDUSTRIAL Market Experts

WHY OUR REPORT IS different

At HLC, we believe that customer service and market knowledge are two of the cornerstones to delivering great service to our clients in the real estate industry. One way we strive to provide both is through our quarterly market updates.

Our Houston industrial market report stands apart because we track and analyze data unlike most others. For example, our report contains only statistics for institutional-grade distribution and flex buildings. While we recognize that specialized manufacturing buildings play an important role in Houston’s industrial market, we believe they should be tracked separately from typical institutional-grade distribution and flex warehouses. Another significant feature that sets our report apart is our submarket boundaries. We noticed that most of the standard submarket definitions used in CoStar and other market reports are not consistent with how the submarkets actually behave. For example, in east Houston, Interstate 10 serves as the boundary between the Northeast and Southeast submarkets in most other reports, but there are dozens of buildings that directly compete on both sides of the interstate. We believe submarkets should show a complete picture of the surrounding competitive set. So, we created our own, based not on arbitrary physical boundaries like roads or neighborhoods, but on which buildings actually compete against each other within a specific region of the Houston market.

We hope you enjoy reading our report and find the information useful. If you have any questions, please don’t hesitate to call or email a member of our team.

JOHN KRUSE KELLY LANDWERMEYER CARTER HOLMES MATT DEWHIRST

HLC OUTLOOK

At the close of Q4 2022, market-wide vacancy for distribution and flex product stood at 7.1% for the Houston market which represents no substantial change from the Q3 vacancy factor, and a year-overyear decline of 170 basis points. Net absorption came in at a healthy 4,900,773 SF for Q4 2022, rounding out the year with over 27M SF of absorption in 2022. New deliveries slowed slightly at the end of the year to 5.2M SF surpassing the 4.6M SF delivered in Q4 2021.

Total SF under construction has increased for the fifth consecutive quarter, with roughly 29M SF of spec and BTS product currently under construction. Nearly 23M SF of new product was delivered in 2022. This, coupled with the year-over-year decline in vacancy demonstrates the strong tenant demand which has shown no signs of slowing with over 40% occupancy in the over 18M SF that has been delivered in the last 12 months.

Much like in Q3 2022, the main driver of the market’s continued recovery from when it was experiencing double-digit vacancy in 2020 and early 2021 is the historic amount of tenant demand we are seeing in virtually every submarket. Leasing activity totaled 9,297,342 SF during Q4 2022, a slight decrease from Q3 2022, but still a historically high number for our market and over a 1M SF increase compared to Q4 2021. There are three distinct submarkets that are benefiting the most from this frenzy of activity: the Northwest, North, and Port submarkets. These three submarkets have accounted for nearly 70% of YTD leasing activity while only making up 58% of the total market’s inventory. Due to continued population growth and the need for retailers to import large quantities of consumer goods through the Port of Houston, we are expecting these submarkets to continue to outpace the rest of the market, which has led to tangible rent growth throughout 2022.

Alternatively, if there is a submarket that is worth monitoring for signs of trouble, it would be the Far West submarket. This submarket finished the year with a vacancy factor of 14.9%. Although there have been a handful of +1M SF leases signed recently, with approximately 4.5M SF of product currently under construction, almost all speculative, it will be imperative that tenant demand increases above historical averages (outside of design-build requirements). The strategic Far West submarket has averaged just over 500K SF of quarterly absorption since the beginning of 2021.

HOUSTON INDUSTRIAL Trends & Transactions

TRENDS AND TRANSACTIONS

Total YTD leasing activity stands at nearly 40M SF market-wide, just 3M SF shy of our historic 2021 total. Tenant demand in the Port submarket will likely continue to rise as the Port of Houston posts record container volumes. Additionally, the Port submarket has seen an influx of retailers and 3rd party logistics service providers from California who are seeking to leverage the Port of Houston in light of head winds affecting LA/Long Beach and Inland Empire.

Turbulence in capital markets continues as rising interest rates have caused many potential buyers and sellers to reassess both deals on the market and new developments. Adding to this challenge is the continued increase in material and labor costs.

HOUSTON INDUSTRIAL Facts & Figures

SOURCE: COSTAR

HLC OUTLOOK

The Far West submarket is located along Interstate 10, stretching west from Highway 6 past Brookshire, and encompasses areas in Harris, Fort Bend, and Waller counties. The submarket benefits from immediate access to Interstate 10, convenient citywide connectivity via the Grand Parkway, continued population growth in West Houston and Katy, and the ability to serve multiple major cities in Texas from a single location. As Houston’s population continues to grow west, the submarket’s strategic location will make it an attractive option for new regional e-commerce distribution centers. Prominent tenants and users in this submarket include Medline, Tesla, Goya Foods, Rooms-to-Go, Amazon, Costco, Bel Furniture, Academy Sports + Outdoors, Domino’s, Ross Dress for Less, Glazer’s Wine & Spirits, 99 Cent Stores, and Igloo.

Vacancy in the Far West increased to 14.9% in Q4 2022 from 14.1% in Q3 2022. Similar to the previous quarter, the increase in the vacancy rate is due to the continuing new construction occurring in the submarket with another 1,663,206 SF of deliveries occurring during the Q4 2022. The total 2022 deliveries for the Fast West submarket is 4,759,270 SF. This continued new construction in the Far West submarket increased the overall size of the submarket by 15%. The Far West submarket continued to experience positive absorption with 1,165,816 SF during Q4 2022. There is a total of 7,711,021 SF under construction which is the largest amount in comparison to all other submarkets.

NEW DEVELOPMENTS

• Empire West Business Park | Phase 2 – a 2.3M SF development with Stream Realty

• Kingsland Ranch Logistic Park – a 1.4M SF development with Falcon Development/Clarion

• Grand Central West Industrial Park – a 1.2M SF development with PinPoint Commercial

• Wood Road Business Park – a 1M SF development with Crow Holdings

• Kingsland 10 Business Park – a 598K SF development with Adkisson Development

• Twinwood Distribution Center II – a 546K SF development with Clay Development/Greenlaw

VITAL STATS

• Park 10 Ninety Nine – a 371,260 SF development with Yacoel Properties

• Pederson Logistics Center – a 343K SF development with Triten Real Estate Partners

• IDV West Ten – a 184K SF development with IDV

• Westside 10 Industrial Park – a 167K SF development with Phelan Bennett/Growth Capital Partners

• Kingsland 10 Business Park – a 433K SF development with Adkisson Development

• Point West Distribution Center 1 – a 133K SF development with Realty 1 Partners

• Grand West Crossing – a 120K SF development with EastGroup Properties

• West Ten Business Park – 51K SF a development with Adkisson Development

LARGE EXISTING VACANCIES

• The Uplands Twinwood DC 1 – 737,630 SF

• The Uplands Twinwood DC 2 – 546,000 SF

• Pederson Logistics Center – 343,760 SF

• Empire West Business Park Building 4 – 333,330 SF

• Empire West Business Park Building 5 – 229,150 SF

• Westside 10 Industrial Park – 167,120 SF

• Kingsland 10 Business Park Building 2 – 149,500 SF • Empire West Business Park Building

NORTHWEST

VITAL STATS

HLC OUTLOOK

NEW DEVELOPMENTS

• Interchange 249 | Phase I – a 1,881,318 SF development with Lovett Industrial and Clarion Partners

• Great 290 Distribution Center – a 500,840 SF spec development with Pagewood and STAG Industrial

• Fairbanks Logistics Park – a 1,012,037 SF spec development with IDV and Dalfen

• Urban District 290 – a 238,200 SF spec development with Urban Logistics Realty and Crow Holdings Capital

LARGE EXISTING VACANCIES

• 6400 Hollister Road – 276,600 SF

• 4414 Hollister Road – 234,215 SF

• Weiser Business Park Building 2 – 223,400 SF

• Westland Business Park – 219,800 SF

• Northwest Distribution Center – 180,947 SF

The Northwest submarket is the largest of the eight Industrial submarkets HLC tracks in Houston with more than 119M SF of product or approximately 30% of the institutional industrial product in Houston. Geographically located north of Interstate 10 along Highway 290 and West Sam Houston Parkway corridors, the submarket has historically offered a “Main and Main” location for distribution tenants needing to be close to the regional population center. Recently, the Northwest submarket has expanded well beyond Sam Houston Parkway, going along Highway 290 toward Cypress and Hwy 249 toward Tomball. Developers have increasingly looked at these suburban locations for new large-scale developments due to the availability of land relative to the area closer to Sam Houston Parkway. Over the last 1218 months we have seen a significant number of developers take land positions in Cypress, Tomball, and Waller in an attempt to meet a growing need from tenants for larger, more modern distribution centers. However, many of these suburban sites come with a lack of infrastructure, which has created a longer development timeline for many projects. Only a handful of these sites are expected to break ground as spec developments in the near future.

In addition to the above-described outward expansion, there are a handful of quality “infill” sites inside of Sam Houston Parkway that have recently been purchased by developers for spec projects. These smaller, oftentimes more challenging sites, have become increasingly in-demand as developers attempt to build Class A product close to the population center.

At the end of Q4 2022, the vacancy rate in the Northwest submarket was 5.9% which decreased when compared to the 6.4% vacancy rate of the previous Q3 2022. Overall, vacancy rates continue to trend downward and tighten since seeing their recent peak of 9.7% during COVID. Net absorption came in at 1.1M SF for Q4 2022 while new deliveries equaled 593K SF. But by far the biggest story in Northwest Houston continues to be the blistering pace of leasing activity. At the end of 2022, we will have seen more than 5.1M SF of leasing activity in the submarket and as a result, rents have begun to increase to levels never before seen in Houston. This strong rental growth is likely to continue, particularly for buildings that are located in “infill” pockets of the submarket.

HLC OUTLOOK

The North submarket provides a strategic location for companies looking for convenient access to George Bush Intercontinental Airport, as well as three of Houston’s most critical thoroughfares: Interstate 45, Sam Houston Tollway, and Highway 59/Interstate 69. This submarket has been one of the fastest growing in recent years due to a growing population in Northern Harris County and Montgomery County to the north, as well as the availability of land for new development relative to the submarket’s neighbor to the west, the Northwest submarket. In fact, we’ve seen the Northwest and North submarkets somewhat bleed together recently with many tenants considering locating in either/or, rather than one over the other. This is a trend that we expect to continue as land and available space both become increasingly harder to find in “true” Northwest Houston, while new spec development will continue in the North submarket in the areas around Bush Intercontinental.

Vacancy in the North submarket increased 10.3% at the end of Q4 2022 which is a slight increase from Q3 2022. Absorption remained strong, coming in at more than 403K SF for Q4 2022 and totaled more than 3.5M SF for 2022. However, the increase in vacancy can be attributed to the 714K SF of new deliveries during the quarter. Currently, there is just more than 1.7M SF of new construction underway in the submarket.

NEW DEVELOPMENTS

• North Central Distribution Center – a 409,795 SF spec development with Crow Holdings Industrial

• Pinto 23 – a 282,190 SF spec development with Griffin Partners

• Kennedy Greens South | Building 2 – a 280,620 SF spec development with Clay Development

• Century Plaza Distribution Center IV – a 120,022 SF spec development with Avera and Meritex

VITAL STATS

LARGE EXISTING VACANCIES

• Kennedy Greens Distribution Center – 524,160 SF

• 59 Logistics Center – 509,600 SF

• IAH Kenswick 1 – 410K SF

• Rankin 45 Distribution Center – 356,236 SF

• Beltway North Commerce Center – 352,680 SF

• IAH West Distribution Center – 318,240 SF

• Kennedy Greens Distribution Center II – 280,814 SF • Cypress Preserve – 257,890 SF

FAR NORTH

VITAL STATS

HLC OUTLOOK

The Far North submarket begins at the southern edge of Montgomery County and stretches north past Conroe. Population growth and easy access to the Dallas-Fort Worth market and the rest of Texas are just some attributes that make the Far North submarket attractive to end users. Another important driver of activity here are the local tax incentives offered by Montgomery County and its various municipalities to attract businesses. This emerging submarket is home to several large distribution centers for companies such as Five Below, Wal-Mart, CVS, Home Depot, American Furniture Warehouse, and Lowe’s.

NEW DEVELOPMENTS

• Springwood Business Park - a 291,889 SF two (2) building project with East Group

• Conroe Commerce Center | Phase I – a 1,224,202 SF development with Lovett Industrial

• Grand Parkway – a 591,200 SF three (3) building project with Lincoln Property Company

As the Houston market’s smallest submarket, with only about 8M SF of institutional-grade industrial product, Far North tends to be overlooked by many investors and brokers. Vacancy was 2.6% at the end of Q4 2022 and has remained below 4% going back to Q4 2020. Much of the activity has been of the build-to-suit variety here. We are beginning to see a few speculative developments announced within the submarket, highlighted by Lincoln Property Company’s Grand Parkway development and Lovett Industrial’s Conroe Commerce Center.

HLC OUTLOOK

The majority of industrial products in the Near East submarket were constructed in the 1970s and 1980s. With limited new construction since that time, the average product age in this submarket is one of the oldest in Houston. Historically, this was the lowest priced submarket in Houston and attracted price-sensitive users. In particular, this submarket appealed to third-party logistics companies, notably resin repackagers. Its widespread rail infrastructure and proximity to the Port of Houston made it the preferred submarket for port-centric users. That preference has diminished in recent years due to its aging / outdated rail infrastructure and the growth of the Port submarket. Additionally, the rent discount this submarket enjoyed relative to competing Houston submarkets has diminished in recent years, reducing its attractiveness to price-sensitive users.

At the beginning of 2021, the submarket vacancy rate hit 11.6%. This was not driven by new deliveries as new construction was minimal, but was due to a number of larger tenants exiting the submarket in late 2020/early 2021 in favor of competing submarkets (North and Port). The submarket had been on a four-year decline to that point, as the vacancy rate had steadily grown from sub-5% as recently as 2017. In addition to the tenant losses, there was a general lack of organic growth from existing tenants, and new tenants to the sub-market were uncommon.

Over the last five quarters, the sub-market has shown a dramatic improvement in leasing activity. However, after finishing Q2 2022 with a vacancy rate in the mid 4% range, the vacancy rate over the second half of the year has drifted higher and now stands at 5.7%. Despite healthy absorption metrics over the past 6 months, deliveries outpaced demand. While the new development pipeline would typically be cause for concern, this submarket is beginning to offer a viable alternative to the Port submarket. With the Port submarket south of the ship channel tightening up with little room for future growth, the Near East provides a viable alternative for those considering areas in the Port submarket north of the ship channel.

The key drivers for the recovery of this submarket over the past 5 quarters came from a variety of third-party logistics providers, both organic growth from existing tenants and new entrants, as well as e-commerce/Retail distribution tenants.

As noted, new development has lagged in this sub-market. Prior to 2022, there had only been 1.1M SF of spec deliveries over the past 20 years. However, as prime development sites across Houston have become supply constrained, developers have sought alternative opportunities. That, along with the improvement in submarket fundamentals has led to numerous active and proposed new developments. The recent, current and proposed activity is focused along the Highway 90 corridor, in the Liberty/Mesa Road area, and at Houston Tradeport.

VITAL STATS

NEW DEVELOPMENTS

• Northeast Crossing – 424,404 SF 687,902 SF by Jackson-Shaw

• C5IP at Ley Road – 408,280 SF by Core 5 Industrial Partners

• Wallisville Distribution Center – 349,440 SF by Stonelake

• Houston Tradeport – 332,064 SF by NorthPoint

LARGE

VACANCIES • NorthPoint 90 Logistics Building 2 – 373,121 SF

EXISTING

8404 East Freeway – 176,201 SF (Doggett holding for their future use)

SHIP CHANNEL PASADENA

MONT BELVIEU MEDICAL CENTER

GALLERIA

MONTGOMERY MAGNOLIA

CONROE

CLEVELAND

THE WOODLANDS NEW CANEY

HOBBY AIRPORT 26,792,962 SF

GEORGE BUSH INTERCONTINENTAL AIRPORT

PORT AREA

VITAL STATS

HLC OUTLOOK

The Port submarket, named for its proximity to the Port of Houston’s container terminals and dock facilities, hosts an extensive network of refineries and downstream chemical plants, and a widespread multi-modal transportation infrastructure including rail. The submarket allows for quick access to both the Barbours Cut and Bayport container terminals where container shipments enter and exit the Houston market.

With 96% of the institutional product constructed since 2000, this submarket is relatively young compared to other Houston submarkets. The main drivers for the submarket include third-party logistics providers (including a majority of the plastic resin repackagers), downstream energy service providers, and retail (ex. Walmart, Home Depot, IKEA, Webstaurant, Floor & Decor).

NEW DEVELOPMENTS

• TGS Cedar Port DC4 – a 1,218,956 SF spec development with TGS

• Portside Logistics Center – a 760,406 SF spec development with Principal

• TGS Cedar Port DC3 – a 664K SF spec development with TGS

• Ameriport 2 – a 651K SF spec development with National Property Holdings

• I-10 East Commerce Center – a 609K SF spec development with Brookfield

LARGE EXISTING VACANCIES

• TGS Cedar Port DC2 | 4407 E Grand Parkway S – 496,421 SF

• Cedar Crossing BP | 4000 Cedar Boulevard – 312,034 SF

• Scout Cold Logistics | 10575 Red Bluff – 248,240 SF

In late 2020 and early 2021, the submarket was suffering with a vacancy rate in the low teens as deliveries had consistently outpaced absorption for several years. After a sluggish first half of 2021, the market has made a significant turnaround over the past 6 quarters and ended Q4 2022 with a vacancy rate of 5.3%. In 2022, this submarket experienced its highest level of absorption on record, ending just short of 8M SF for the year.

The new development pipeline remains very active. While there is activity south of the ship channel, developable sites in this part of the submarket are becoming increasingly difficult to source and face zoning challenges. Thus, deliveries there have begun to wane. It is anticipated that further development in this part of the submarket will diminish further over time. The bulk of current and projected future activity is in the areas north of the ship channel, where there remains abundant land for future development. In addition to the greater Cedar Port area, activity along or near the I-10 corridor on the north side of Baytown has increased significantly.

The new development contrast between south of the channel and north is stark. At year end, the southern portion of the sub-market had 2.2M SF either under construction or had delivered in 2022. There is only an additional 700K SF proposed, with the bulk of that on the far west side of the sub-market near the I-45 corridor. By comparison, the north side of the submarket has just shy of 12M SF under construction or was delivered in 2022.

The new development pipeline continues to be worth monitoring for the submarket overall, with over 8M SF underway and another 13M proposed. The bulk of this activity is north of the ship channel.

HLC OUTLOOK

The appeal of the submarket is due to the strategic location between the Port and Southwest submarkets with quality sites still readily available in close proximity to major thoroughfares such as Highway 288 and Beltway 8 when compared to more land constraint submarkets neighboring the South.

Vacancy increased slightly this quarter to 5.8% with a few new deliveries coming online this quarter. As we enter into 2023, the South submarket has 2.8M square feet under construction This continues to be record breaking amount of new construction for the South submarket is historic since the submarket has delivered less than 1M SF of new construction during the past three years. The biggest news coming out of the South submarket is the announcement that Carson signed a lease at their 288 project as well as the large buildto-deal deal with Target and Memorial Herman signed in Q3.

NEW DEVELOPMENTS

• South Belt Central | Phase II – a 871,780 SF spec development with IDV

• Lone Star Logistics Park – a 658,856 SF spec development with Hines

• Beltway 35 Business Park – a 589,280 SF spec development with Greystar

VITAL STATS

HOBBY AIRPORT ELLINGTON AIRPORT 24,893,612 SF

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Absorption vs. Prev. Qtr vs. 12 Mths Ago (283,106) 49,761 545,091 Vacancy vs. Prev. Qtr vs. 12 Mths Ago 5.8% 4.1% 5.8% Leasing Act. vs. Prev. Qtr vs. 12 Mths Ago 1,669,606 329,611 645,900 U/C SF vs. Prev. Qtr vs. 12 Mths Ago 2,888,158 1,480,269 255,342 Delivered SF vs. Prev. Qtr vs. 12 Mths Ago 151,342 - 20,486 SOUTH HOUSTON HUMBLE CYPRESS PRAIRIE VIEW SPRING TOMBALL BROOKSHIRE KATY RICHMOND SHIP CHANNEL PASADENA BAY TOWN MONT BELVIEU DAYTON LA PORTE MEDICAL CENTER PEARLAND LEAGUE CITY MISSOURI CITY SUGAR LAND GALLERIA MONTGOMERY MAGNOLIA CONROE CLEVELAND WILLIS THE WOODLANDS NEW CANEY GEORGE

2 0 %

LARGE EXISTING VACANCIES • 10001 0 0 %

Fannin St – 151,342 SF 1 0 %

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6 00 0 0 0 Q4 1 9 Q1 2 0 Q2 2 0 Q3 2 0 Q4 2 0 Q1 2 1 Q2 2 1 Q3 2 1 Q4 2 1 Q1 2 2 Q2 2 2 Q3 2 2 Q4 2 2

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SOUTHWEST

VITAL STATS

HLC OUTLOOK

The Southwest submarket is located west of Interstate 610, bordered on the north by Interstate 10, and extends just east of the Fort Bend Parkway Toll Road encompassing areas in both Harris and Fort Bend Counties. The Southwest industrial submarket has seen significant growth in the last several years due to both speculative and buildto-suit construction. The submarket benefits from its proximity to the affluent population base of Sugar Land, coupled with an identical proximity as the Northwest submarket to Houston’s main population centers in West Houston. The submarket is well positioned to see an increase in demand in coming years from its direct proximity to the dense and continually growing population base in both West and Southwest Houston.

NEW DEVELOPMENTS

• The Business Center at Five Corners – a 541K SF development with Levy Group

• Kirkwood Industrial – a 540K SF development with Crow Holdings

• Post Oak Logistics Park – a 536K SF development with Jackson Shaw

• Main Central Business Park – a 523K SF development with Clay Development

• Fondren 8 Crossing – a 171K SF development with Adkisson Development

• Bluebonnet Nutrition Corp – a 128K SF build-to-suit by Midway

• Cravens Crossing – a 112K SF development with Vigavi

LARGE EXISTING VACANCIES

• Park 8Ninety Building 11 – 440,014 SF

• Kirkwood Industrial Building 2 – 325,028 SF

• 9500 W Sam Houston Parkway South - 307,200 SF

• Boulevard Oaks Business Park Building 5 – 151,740 SF

• The Business Center at Five Corners Building 3 – 133,120 SF

• Sugar Land Gillingham Distribution Center – 112,002 SF

• Boulevard Oak Business Park Building 6 – 109,800 SF

• Sugar Land Crossroad Building 2 – 103,000 SF

Vacancy was 6.0% at the end of Q4 2022 which is a decrease from 7.2% vacancy rate from the previous Q3 2022. The decrease in the vacancy rate was due to the 948,867 SF of positive absorption occurring during Q4 2022. The total Q4 2022 vacancy rate reflects the lowest quarter submarket vacancy rate the submarket has seen in the last three years. The Southwest submarket currently has 1,445,087 SF under construction which accounts for only approximately 4.9% of the total under construction for the entire Houston industrial submarket. Construction deliveries during Q4 2022 were only 278,750 SF for the Southwest submarket which is part of a larger trend in the Southwest submarket experiencing 700K SF or less in Construction deliveries for the past five quarters. This is in contrast to the record breaking 5.9M SF of Construction deliveries that occurred in Q3 2021 mostly attributable to several Amazon facilities being completed. Demand and interest from tenants in the Southwest submarket remains high. As development sites have become more scarce in the Southwest submarket, developers have begun to shift their focus on new opportunities in the nearby South submarket along Sam Houston Tollway as an alternative.