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Houston Industrial Market: Smaller Product Struggles, Big Distribution Thrives

COE Distributing will occupy 251,000 square feet at Highland Grove Industrial Park in Houston that was previously leased to Randalls. Large distribution users continue to see value in Houston and help re-shape the market's identity.

All the recent talk in the Houston industrial market has focused on the amount of distribution space that is under construction or proposed for development. As a result, many industrial real estate professionals are worried about certain submarkets becoming overbuilt.

This is a reasonable thought, given that Houston has more distribution space under construction than ever before — roughly 18 million square feet is under construction citywide, compared to the previous high in 2015 of 15 million square feet. However, there is also an exceptionally high level of demand in the market that could easily allow more than half of that space to be quickly absorbed once delivered.

Robert McGee, Lee & Associates

What is most promising about Houston’s industrial market — and what has also partially defined the evolution of this space — is the sheer volume of larger requirements. There are currently more than a dozen deals  across the city involving users that are seeking anywhere from 400,000 to 1.5 million square feet.

This certainly bodes well for Houston’s industrial distribution market, which continues to attract large-scale developers and tenants due to the growing local and regional
population. Access to the Port of Houston — which is great for retailers looking for another port of entry and resin exporters, to name a few — has also been and continues to be a major demand driver in the distribution market.

However, this demand has also been somewhat frustrating. For instance, in the North Houston submarket, of the 9 million square feet under construction or existing, 7 million square feet is cross-dock product with an average size of 330,000 square feet. Less than 1 million square feet of that product is front-load, and the balance is all rear-load space.

Among these vacancies, only two buildings feature more than 400,000 square feet of space: Archway Properties’ Parc Air 59 (685,400 square feet) and Clay Development’s Kennedy Greens Business Park (524,528 square feet).

At the opposite end of the spectrum, most of the other requirements in the market have been under 100,000 square feet, which is leaving a large gap where requirements are probably needed most. Still, most of the ownership entities will eventually consider dividing buildings up to meet the current demand if they haven’t already. The demand is always changing.

The manufacturing market remains steady but has seen its share of changes with oil prices remaining lower for longer than expected. The smaller (sub-30,000 square feet) freestanding, crane-served requirements, which we couldn’t build our way out of before the crash in oil prices, have yet to return in any real numbers.

Those requirements, primarily used by upstream-related service companies, have moved closer to drilling sites in markets like Midland and Odessa. But the bright side is that  there isn’t a surplus of crane-served buildings on the market under 30,000 square feet either.

Activity for crane-served product that is 60,000 square feet or more has been very good, but mostly due to many other uses unrelated to the upstream oil and gas industry. These are larger users catering to steel, pipe, coatings and other midstream- or downstream-related uses.

Manufacturing buildings over 60,000 square feet are rarely speculative, and most of the availabilities are coming from existing space vacated by tenants that are expanding into larger buildings or through consolidations. This has kept rents stable in the market and while also spurring continued interest from users for build-to-suits.

— By Robert McGee, principal, Lee & Associates. This article first appeared in the November 2019 issue of Texas Real Estate Business magazine. 

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