Houston's Industrial Sector Poised to be Among Healthiest Markets in U.S.

The lack of available inventory is pushing development outwards and driving rental rates and sales prices upward. This trend will continue to grow into 2013, but rental rates and sale prices will taper-off midway through 2013 as the market can only bear so much increase. Land prices have also seen a sharp uptick forcing users and developers to consider sites upwards of $4 per square foot when they have historically fought to stay under $3 per square foot. Additionally, there is a strong need for rail-served land sites or facilities. As the energy sector continues its growth and the Port of Houston takes on more capacity, the need for rail served sites will grow and developers will be move to increase the supply of inventory. This is evident from new projects like the 250,000-square-foot speculative rail distribution warehouse at Port Crossing Commerce Center in La Porte that was recently completed by National Property Holdings and ML Realty.

There have been several recent deals announced that will have an effect on the market. First, DCT Industrial Trust, Inc. is fully occupied at its Northwest Distribution Center after having executed a full building deal (264,000 square feet) with DB Schenker Logistics. This transaction took off the market one of the few large blocks of contiguous industrial space, thus further cementing the need for new spec development in the northwest submarket. Second, Pannattoni Development and Parkside Capital announced the execution of a 420,000-square-foot build-to-suit for Igloo Products at their West Ten Business Park in Katy. This announcement comes off the heels of Parkside Capital’s announcement of an equally impressive 500,000-square-foot build-to-suit deal at West Ten Business Park with Medline Industries. Couple those two major deals with the new Weatherford International west of Katy and the herd mentality of our industrial folks will take hold, thus driving more development even further west.

I see nothing that is “controllable” that needs to change in the market to spur more acquisition or development. The availability of good land sites that are also priced to allow for industrial development is the biggest challenge in the market preventing new development. Also, the multifamily market is driving the price of land up to near office development figures. The multifamily market has historically not been competitive with the industrial developers.

Construction financing is currently available in today’s market for new speculative development on a non-recourse basis at 50 percent loan-to-value, which is encouraging given where the economy has bounced back from since the start of the recession in late 2008. The caveat being though that in past years it had been available at a 75 percent LTV. This metric really helps to be a governor of new supply in the market and has in more recent years paced a entry-barrier on the smaller local merchant developer who needs an equity partner in addition to the institutional lender. As many professionals in the field will attest, it’s becoming more difficult than ever to compete with REITs in today’s fluid market.

However, construction debt is available on a much more aggressive level for a build-to-suit project, which is an area that the smaller developer can be more competitive. On the contrast, the owner/user lending environment is much more favorable with local and regional lending institutions bringing back 10 to 20 percent LTV deals, thus driving owner/users building sales to near 2007 levels.

The north, northwest and far west Houston submarkets are the areas that I would characterize as being hotspots, with the port market following close behind. In recent months, there has been increased activity around Interstate 45 North along Beltway Eight over to State Highway 249 with additional projects being planned along the 290 corridor. The lack of available sites in the favored northwest Houston submarket is pushing development out to areas that have historically not seen speculative development on a large scale, such as Katy. The trend of new products outside of the traditional core market area will continue as is evident from groups like Transwestern and Eastgroup that will be delivering their two projects at Mason Road and Interstate 10.

We have no glass ball but we believe there will be two or three very large build-to-suits in excess of 500,000 square feet announced for Houston in 2013, along with a major speculative industrial development planned in far northwest Houston near Highway 6.

— Clay Pritchett, senior associate with NAI Houston