Office warehouses, which fit into the industrial family of commercial real estate investments, have recently jumped in Houston area markets. This article will go through the what, where, and why of these types of investments. In addition, it will demonstrate why investors should consider these types of investment opportunities.

What

What are these structures, and who is renting them? These structures are a mix of office space accompanied by warehouse space, making them versatile and suitable for an extensive range of businesses. The primary tenants consist of companies who need industrial space to accommodate large industrial equipment or tenants who need large amounts of space to store merchandise. These components make this an excellent option for manufacturers, distributors, and even online/physical retailers.

Where

Where this trend is currently taking place is inside our Houston market.  A range of indicators are happening locally to support current growth and indicate further market expansion. The first of these indicators is the rate of delivery of these types of structures vs. absorption. In 2021, 50 million square feet of industrial space saw delivery, and still demand outpaced the delivery of these projects by a projected 2 million square feet. Because of this, rents are projected to grow an additional 5.5%, and the vacancy rate is to drop to 6.4% in this sector. Another factor that indicates growth in the market is projected delivery for the year 2022 in this sector drops to 17 million square feet, which is far smaller than the previous year’s 50 million square feet, which was still outpaced by 2 million square feet. See the figure below which illustrates the how office warehouse completions rank against absorptions since 2018.

Why

Why Office Warehouses are seeing so much growth is due to the sudden surge of e-commerce. With this surge, many of these businesses no longer need storefronts, only office and storage facilities. This makes office warehouses suitable for this rapidly growing demographic of tenants.

Another market factor that makes this an enticing investment is that this type of structure is now attracting tenants who would not ordinarily rent these spaces. This is because the COVID-19 global pandemic caused supply chain issues, which required many businesses to re-evaluate their need to hold more merchandise than they would ordinarily. This forced many companies out of spaces they would traditionally rent and into spaces such as office warehouses. Lastly, market projections also indicate rent in these structures to grow to $8.08, increasing the potential for investor returns on these investments. In addition, the projected average return of these structures should be around 14.8 % in 2022 nationwide.

Conclusion

After considering all of these factors and the booming Houston economy bringing more jobs, there will be an increased need for office space as we return to normalcy post-Covid. It is safe to say that the outlook for these investments in 2022 is positive, with more potential in the future as industries become more highly specialized and require more sophisticated facilities giving a chance for value-add investments. These factors will create a “perfect storm” for this market sector as it continues to grow and evolve, making office warehouses very desirable to investors.