The Houston industrial real estate market continues to flex its muscles even after a record-breaking year, with a shift from record development to a modest slowdown in the development pipeline and a slight pullback on total net absorption. Despite these changes, market fundamentals remain strong with a 4.4% vacancy rate, thanks to 7.8 million sq. ft. of newly delivered inventory.
The heart of Houston's industrial growth beats in the expansion of suburban population centers, emphasis on nearshoring, and focus on ESG investment. The region's robust tenant demand has driven 7.8 million sq. ft. in new deliveries. The Port of Houston's recent infrastructural improvements, with dredging the 11.5-mile segment from Bolivar Roads to Redfish, has propelled this growth even further.
As industrial demand surges, average rental rates have also risen to $0.78/sq. ft. on a monthly, gross basis, reflecting a significant 19.4% increase compared to Q1 2022. This increase can be attributed to limited inventory and economic uncertainty. Particularly in the Northwest, Southwest, and North submarkets, asking rates have reached an average of $0.85/sq. ft. overall and $0.79/sq. ft. for Class A Warehouse/Distribution space.
While vacancy and availability rates have experienced fluctuations over the past year, the industrial demand's strength has led to long-term record lows in vacancy rates. This ongoing supply-demand imbalance, coupled with 28.8 million sq. ft. underway, positions Houston's industrial market for notable absorption in the coming quarters.
However, these promising signs do not come without their fair share of challenges. Houston's industrial construction pipeline faces headwinds from the capital markets environment, with unfavorable construction costs and timelines posing ongoing issues. Developers, however, are not deterred and have broken ground on nearly 3.1 million sq. ft., contributing to the total of 28.8 million sq. ft. of reported construction in Q1 2023.
Despite the challenges, there is a reason for optimism. The West Houston submarket expansion has made a notable impact, delivering 3.5 million sq. ft. in Q1 2023, and currently having 2.7 million sq. ft. underway. This growing area has contributed the most to total net absorption this quarter, marking a significant milestone in Houston's industrial real estate landscape.
Looking ahead, the Houston industrial market appears well positioned for further growth. Broker sentiment highlights the continued expansion of the ecosystem of suppliers supporting large manufacturers entering the market. ESG initiatives, namely solar energy, and electric automotive sectors, are expected to drive investment into the business friendly MSA.
As we move towards 2024, the Houston industrial market may see a reduction in the pipeline due to changes in capital markets. However, logistics and distribution remain key drivers for industrial demand, while manufacturing and new energy projects are anticipated to diversify the occupier types.
As an experienced full-service property management company, Cinch is fully equipped to navigate these promising yet challenging conditions. We understand that managing industrial properties in a rapidly changing market can be complex, and our services are designed to make it simpler. Whether it's negotiating leases that reflect the rising rates, working with developers to manage new construction projects, or providing CAM services to maintain the value of properties, Cinch has the expertise and the local knowledge to ensure your investments are well-managed and your returns are maximized.
In the face of these ongoing shifts in the Houston Industrial Market's 2023 forecast, partnering with a local, experienced property management company like Cinch is more critical than ever. As we continue to monitor these trends, we remain dedicated to keeping our clients informed and their investments secure.
The information contained within this report is gathered from multiple sources believed to be reliable. The information us purely educational, and not advice, and may contain errors or omissions and is presented without any warranty or representations as to its accuracy.
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