Businesses and industries whose supply chains are tied to Port Houston are dealing with tariffs on select imports, volatile energy markets and a one-two punch of rising rents and construction costs for any industrial space they want to lease or have developed for them. But based on the performance of Houston’s nearby Southeast industrial submarket, these larger geopolitical and economic forces are wreaking minimal havoc.
An increasingly diverse mix of industrial users has landed in Houston over the past five or so years. These tenants include national retailers and third-party logistics (3PL) firms that see Houston as an emerging regional distribution hub, as well as suppliers of durable consumer goods and companies that service the petrochemicals industry. The port submarket is seeing heightened activity from all of the above.
At the same time, the infrastructure within Port Houston has expanded. Ship channels are in the process of being deepened and widened. Special equipment has been introduced that allows overweight containers to safely and legally leave the port and hit the roadways. Demand for rail-served properties is growing, particularly on the north side of the Houston Ship Channel, leading to more of those projects. And Harris County has begun work on its six-year, $1 billion project to rebuild the ship channel bridge along Sam Houston Tollway, creating a thoroughfare with four lanes in each direction instead of two.
The positive forces impacting the performance of the port’s surrounding industrial submarket far outweigh the negatives. Consequently, demand for space is high, new construction is humming along and balance appears to be prevailing thus far in 2019.
“There’s a lot of new industrial product coming out of the ground,” says Gary Mabray, principal at Colliers International’s Houston office and longtime industrial broker throughout the Gulf Coast. “Some might be worried about oversupply, but demand is keeping pace with new construction and has not outstripped supply to the point that rates are slipping or landlords need to make concessions.”
Gary Mabray, Colliers International
Figures & Fundamentals
According to research from JLL, in 2017, the Southeast submarket posted positive net absorption of 3.7 million square feet while adding 2.6 million square feet of new space and closing the year with 4.2 percent vacancy. In 2018, total absorption in the port area was 4.3 million square feet to go with supply additions of 2.6 million square feet and a vacancy rate of 4.1 percent.
According to a January press release from the port, 2018 was a record year in several categories. The port handled 35.7 million tons of cargo in 2018, up 9 percent from 2017, resulting in a record operating income of $366 million. The port also trafficked 2.7 million twenty-foot equivalent units (TEUs) in 2018, a 10 percent increase over the prior year. The port remained a market leader in exports of polyethylene resins and handled 21 percent more tonnage of steel than in 2017.
As a result of elevated activity both within and around the port, rental rates are rising. This holds true across all sub-types of industrial product — cross-dock, front-load, flex — as landlords near the port field demand from old and new users alike. New construction commands higher rents, but the market is not necessarily suffering from an excess of outdated inventory, says John Talhelm, a senior vice president at JLL with nearly 30 years of industrial tenant representation and investment sales experience.
“In terms of new leasing activity, we’re seeing a movement from older to newer space,” says Talhelm. “It’s not an outright flight, but low vacancy and balanced new deliveries are causing rates to rise. But because there are many localized businesses that have been around and support the industries along the ship channel, when vacancies occur in Class B and C product, we see them backfill pretty quickly.”
John Talhelm, JLL
In the past 12 months, 3PL users have grown their footprints in Houston’s northern submarkets, but the concentration of those users is still strongest in the Southeast, according to Talhelm. This is because these users cater to the manufacturing side of the market and provide warehousing for finished product as well. 3PL firms are also connected to Houston’s burgeoning petrochemical industry, the production and distribution of which are deeply rooted in port activity.
“Companies that handle packaging and shipping of plastic resins or finished products like lubricants, oil, antifreeze — goods sold in the automotive industry, for instance — they occupy a significant amount of space in the Southeast submarket,” says Talhelm. “But that’s specialized space because those users need rail service.”
Such users that have established large footholds near the port include Plastic Bagging & Packaging (PBP), which has a 832,000-square-foot build-to-suit facility currently under construction; Vinmar International, which occupies 500,000 square feet; and Ravago, a Belgian firm that is the world’s largest plastics trader and has invested $100 million in port facilities, including a 720,000-square-foot warehouse.
The recent expansion of plastics users has been and will remain critical to balance at the port as Houston’s population continues to grows and new distribution facilities come on line.
Retail Contributions
National retailers that sell petrochemical-based products are taking down industrial space around Port Houston as part of ongoing efforts to compress their supply chains and cut down on costs of regional distribution.
As more companies scale their operations and address this problem with regard to the Southwestern United States, Houston and its growing population look increasingly appealing. This growth in regional distribution is contributing to the equilibrium between new development and absorption, both near the port and elsewhere.
One of the more well-known companies that fits this description is Valvoline (NYSE: VVV). The Lexington, Kentucky-based motor oil company that also provides automotive tune-ups and repairs recently leased 472,000 square feet at Port Crossing Commerce Center in La Porte. The facility is located near one of the company’s manufacturing plants and provides convenient access to both the Barbours Cut and Bayport terminals.
Mabray of Colliers, who represented landlord Liberty Property Trust in the Valvoline deal, points to the likes of IKEA and Dollar Tree as other examples of retailers that are growing their distribution presences in Houston. The only difference is that these retailers are now targeting other submarkets where land may be cheaper.
The Swedish furniture company expanded its footprint near the port in 2017 and has now reportedly acquired land at Generation Park on Houston’s northeast side for another distribution facility. Virginia-based Dollar Tree, which also sources much of its inventory from the port, also appears happy with its decision to invest distribution operations in Houston and is planning a 1.1 million-square-foot facility in Rosenberg, a southwestern suburb of Houston. Atlanta-based Home Depot also recently signed a 771,000-square-foot lease at Grand National Business Park, a development by Hines on the northwestern side of the city.
“In terms of demand, the mix between consumer goods and energy is still very vibrant,” says Mabray. “And as the volume of imports from these users grows, we see bigger and bigger warehouses and distribution centers come out of the ground.”
Landlord Perspective
Both PBP and Vinmar operate out of Cedar Port Industrial Park, one of the largest industrial parks in the world. The property, which is owned by port development and railroad services company Trans-Global Solutions (TGS), spans more than 15,000 acres.
According to James Scott, president at TGS, being a successful landowner near Port Houston is an exercise in longevity. Large infrastructural projects that facilitate industrial development usually take years, if not decades to complete and often coincide with one or more broader economic downturns.
This aerial image shows the facilities of Walmart (back) and Plastic Bagging & Packaging (front) in Cedar Port Industrial Park. The facilities of these users total approximately 4.2 million and 832,000 square feet, respectively.
“The size and number of distribution and warehouse projects in Houston are setting records,” says Scott. “As a landlord, it’s all about staying ahead of the growth. We still have 11,000 acres to develop here at Cedar Port, and when you consider what that will look like in 20 years, we know we’re going to need all the infrastructure that’s being built right now.”
Scott adds that as development and absorption at Port Houston and the surrounding submarket grow, both builders and users will increasingly look eastward for sites and spaces.
Joel Michael, a member of NAI Partners’ industrial brokerage team, has represented TGS in a number of lease negotiations. After 15 years in the Houston market, Michael is seeing the number of quality sites for development near the port start to dwindle. And with construction costs still showing scant signs of flattening, having shovel-ready sites goes a long way in boosting occupancy.
“You can still find dirt in the Southeast submarket, but having sites that are ready to go with utilities and rail service gives a landlord a big advantage,” he says. “We’ve been feeling the effects of post-Panamax ships coming in, and a lot of that has driven the expansion of distribution deals and the actual size of those deals.”
Joel Michael, NAI Partners
According to Michael, between new product that is existing, under construction or proposed, there is more than 5 million square feet of industrial space in the port submarket, which is bounded by Interstate 10 to the north and Interstate 45 to the west.
And although oil and gas companies often cluster their operations in northern submarkets, manufacturing space near the port that was vacated by these users during the oil bust is beginning to fill up as well. That trend is a ringing endorsement that Houston’s economy has diversified significantly beyond oil and gas. Without the economic engine that is the port, that might not be the case.
— By Taylor Williams. This article first appeared in the April 2019 issue of Texas Real Estate Business magazine.