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Houston’s Monthly Metrics: May 2018

The following article originally appeared in the May newsletter to clients of FMI Corporation, for the purpose of providing the latest leading indicators and industry issues to those clients.  Reprinted with permission.

As CBRE’s first-quarter numbers begin to roll in, we can see that Houston is continuing its gradual recovery toward historical averages. Houston posted nearly 95,000 new residents in 2017, the second-largest increase in the U.S., with one-third of those coming from net in-migration – meaning people still see opportunity in Houston and are moving here. While our employment numbers are still below our long-term average, the population growth is helping to drive growth and demand in our area.

The light industrial market’s strong demand persists. In addition to years of online retailer expansions driving growth, the healthier oil prices are also heating up demand from the downstream energy markets. With a 5.2% vacancy rate, and compressed even further in some submarkets, a sizable 8.3 million square feet is currently under construction, 2.1 million of which broke ground this quarter. As shown in the chart, our vacancy rate has remained tight as millions of square feet have been delivered over the last few years. If the first quarter is any indication, 2018 will be another strong year for the light industrial segment.

Despite bankruptcy announcements, the retail segment demand remains healthy, with grocery-anchored centers continuing to dominate. Kroger recently announced expected hiring in Houston, and the Fiesta grocery chain was recently acquired by Grupo Comercial Chedraui, a Mexican grocer looking to strengthen its influence with Mexican-American shoppers. Retail occupancy is a robust 94.4%, above its eight-year average, and over 3.3 million square feet, mostly preleased, is under construction as retailers struggle to find the right space. Retailers continue to find ways to draw consumers into their stores or to offer more online/delivery services for shoppers, which reinforces the light industrial market.

The office market remains the exception to the recovery across the city. With a vast amount of sublease space still available, tenants are vacating their Class B spaces for more favorable Class A terms. Additionally, the first wave of sublease contracts signed after oil’s downturn in 2014 are expiring, causing some additional move-outs. Furthermore, the oil industry continues to restructure, which has continued the trend of shedding space. As such, total available space rose again in the first quarter to 22.2%, making it the highest vacancy level since 1995. We are hearing reports that some office submarkets plagued by vacancies are planning renovations to compete with Class A, which should provide interiors companies with opportunities this year.

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