The following article originally appeared in the March 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 the year-end numbers come in, Houston’s economy continues to show that it is improving and accelerating.
CBRE’s fourth quarter report reveals that the office market had its first quarter of positive net absorption in 18 months. Though it is too early to call this a recovery, overall absorption was negative 2 million square feet in 2017, and both direct and sublease space are being absorbed, which is necessary for a recovery to begin. The vacancy rate sits at 17.3% while total availability (direct plus sublease space) hovers at 21.7%. CBRE anticipates the market will have flat absorption through the first half of the year, barring any jump in employment growth projections.
The fourth quarter light industrial report from CBRE shows a hot market becoming even more constricted as availability of space tightens. With vacancy now at 5.4%, the majority of new starts in the fourth quarter were spec buildings as this market tries to catch up with demand. There is currently over 8.4 million square feet under construction, with 3.3 million square feet breaking ground in the last quarter of 2017. In addition to demand related to Harvey, both the Port of Houston and petrochemical demand have remained strong. This market is expected to continue to be solid in 2018.
The retail market ended 2017 on a high note, with the strongest quarter of net absorption of 851,750 square feet, bringing the annual total to almost 2 million square feet, nearly double the 10-year average. Hurricane Harvey, while a blow to those local retailers affected by floodwater, has been a blessing for others as consumer and business spending has improved due to recovery expenditures. There is currently just over 1.5 million square feet under construction and only 5.9% vacancy across our region. With regional retail sales volumes and sales growth forecast to increase over the next five years, our retail market is in a good position for the year ahead.
The multifamily market was overbuilt in 2017, but, like retail and light industrial, has Hurricane Harvey to thank for a strong fourth quarter finish. As displaced residents took on short-term leases, the sector was able to absorb the second-highest number of units in a single quarter, behind 2005’s third quarter which followed Hurricane Katrina. The occupancy rate rose to 89.4%, and absorption exceeded deliveries for the first time since 2013. With 9,751 units currently under construction, we are cautiously optimistic that this market learned from its prior mistakes and will wait for those short-term, Harvey-related leases to expire before ramping up construction again.
Fortunate for all these markets is the projected employment growth by several economists along with the Purchasing Manager’s Index (PMI) staying in positive territory for 10 of the 12 months in 2017. The PMI is a great leading indicator of our city’s economy, and it currently sits at 54.5 (anything above 50 is expansion; anything below 50 is contraction) with the support of downstream energy and a more robust outlook from most of its respondents.
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