By Taylor Williams
If ever there was a time to start a commercial real estate story with a line about how everything’s bigger in Texas, a 2022 update on Port Houston’s activity would surely be it.
For that really is the case in and around Houston’s economic engine. The various pieces of infrastructural groundwork that the port began laying over the last decade-plus in anticipation of expanded activity are seeing heavier utilization. The channel itself, its shores lined with 900-ton cranes, are being deepened (from 45 to 46.5 feet) and widened (from 530 to 700 feet) at accelerated paces to accommodate the ever-growing volume of cargo passing through the port. And with the forward progress of all these projects and initiatives comes healthy demand for bigger industrial tracts to develop and spaces to lease.
“We’re simply in a different place now than we were a decade ago,” says John Moseley, Port Houston’s chief commercial officer. “At that time, not everybody was convinced that Houston would become a massive import hub. But we saw demographic changes and felt that as a marine terminal operator, we controlled our own destiny. So we invested in our infrastructure and economic development to attract distribution users and facilities to this market, and it’s now paying huge dividends.”
Indeed, local industrial brokers say that’s exactly what Houston has become: a critical hub for importation and distribution of all manner of consumer goods to a state that accounts for roughly 10 percent of the U.S. population. And that’s good news for the surrounding industrial real estate community.
“With the Houston MSA’s population growing and reaching almost 7.2 million people, being able to get more inventory from the port area into warehouses near consumers really helps users of all types control distribution,” says John Littman, executive managing director at Cushman & Wakefield’s Houston office. “We see the average deal size in this area getting considerably larger relative to years past to facilitate timely delivery of products to customers, which has only grown in importance over the last two years.”
“Because all water transportation represents the most economical means of getting goods to market, Houston has become a more desirable area for large, single-tenant users that are serving both the Houston MSA and more than half the state’s population within a four-hour drive,” adds John Talhelm, senior vice president with JLL’s Houston industrial services group. “That’s the type of reach and combination that manufacturers of consumer goods want. Houston now has that reputation, and we see all this activity continuing in 2022.”
Littman notes that according to Cushman & Wakefield’s data, in the first quarter of this year, there were 25 leases executed for 125,000 square feet or more. The largest such deal involved Walmart, which has had a distribution presence near the port since the mid-2000s, leasing 1 million square feet at Cedar Port Trade Center in Baytown. The Arkansas-based retail giant is occupying a speculative facility that was developed by Dallas-based Hunt Southwest with the expectation of adding about 300 new jobs to the local economy.
Other sizable deals for retailers in the market of late include TGS Cedar Port Partners, the master developer behind the 15,000-acre Cedar Port Industrial Park, announcing a 507,000-square-foot build-to-suit project for online furniture merchant Article. Home improvement giants Floor & Décor and Lowe’s also committed to new distribution facilities to the respective tunes of 1.5 million and 1.3 million square feet.
Port officials and industrial brokers emphasize that the elevated utilization of Port Houston’s land, nautical channels and infrastructure — and the ability to accommodate that activity — is by design. The mindset that existed 10 years ago (when the concept to expand the ship channel was conceived) or 15 years ago (when the Bayport Container Terminal opened) was that the runway for growth was extensive. That mentality still very much exists with regard to future levels of commerce that the port expects to conduct.
“We’re only about halfway into our total capacity at our two container terminals, which are both designed to handle about 6.5 million 20-foot equivalent units (TEUs) of containers per year,” says Moseley. (The acronym “TEU” stands for 20-foot equivalent units, the most common unit of measurement for containerized cargo.)
“We ended 2021 with 3.5 million container TEUs and will probably do about 4.2 million in 2022 based on current growth patterns,” he continues. “Even now we have a team that’s contemplating what to do after the current capacity is tapped out. But that’s how we’re thinking — staying two steps ahead of the curve.”
In addition, Port Houston has expedited the $1.1 billion expansion of its ship channel to better support gargantuan vessels coming up from the Panama Canal, including allowing for safe two-way traffic. That project, the likes of which are often planned and executed over 20 years, could be completed as early as 2025. The port is accomplishing this feat via a fast-tracking agreement with the U.S. Army Corps of Engineers and by leveraging federal approval via the Water Resources Development Act and support at the congressional level.
“Users and landlords welcome port projects with regard to deepening and widening of channels,” says Tyler Maner, managing director at Stream Realty Partner’s Houston office. “Furthermore, a lot of tenants and landlords are confident in their bets on the port based on what they’ve seen thus far, which is that the port isn’t waiting to expand until its traffic and volumes reach critical points. Instead, the port is actively preparing for future growth.”
Symbolism of Cranes
Simply put, the need for more wider and deeper waterways and larger warehousing and distribution facilities stems from increased volumes of product passing through the port.
And that activity kicked off the new year with a bang. In January, approximately 323,000 TEUs were trafficked through the port, a 27 percent increase from January 2021. While the volume in February decreased on a month-to-month basis to about 271,000 TEUs, that figure still marked a 37 percent increase from February 2021. Over the course of the entire first quarter of this year, Port Houston handled about 903,000 TEUs, a year-over-year increase of 20 percent.
Cranes have become the visual embodiment of this growth. Having the latest and greatest cranes — and plenty of them — is beyond critical to the efficient handling of this cargo, and the port has spared no expense in that regard.
Port Houston has bolstered its supply of cranes to more efficiently handle the ever-growing volume of product passing through its channels. The port brought in three new ship-to-shore cranes in February, and brokers in the area report fielding an increased level of requirements for crane-served industrial spaces.
In mid-February, the port announced the arrival of three new neo-Panamax cranes, named for their ability to on- and off-load containers from the largest ships that pass through the Panama Canal. These “ship-to-shore” (STS) cranes are manufactured in China, stand nearly 160 tall and have an outward reach equivalent to the total width of 22 neo-Panamax containers. And according to Moseley, they cost about $15 million apiece and have a typical life cycle of about 20 to 30 years.
With the addition of the three new machines on Feb. 10., the port’s fleet now comprises 28 STS cranes and 110 rubber-tired gantry (RTG) cranes. The latter refers to cranes that possess tires that allow for lateral movement and stack containers in outdoor storage yards. Both types of cranes are designed to deliver efficient movement of cargo across intermodal operations.
“When we invest in a crane that has a 30-year cycle, we not only consider its cost, but also its ability to handle the next-generation ships when they arrive,” Moseley says. “If you stood these ships vertically, they’d be taller than the Empire State Building, and these cranes can offload and reload those containers very quickly.”
Cranes are also a physical bellwether of growth for the port’s surrounding industrial market, notes Talhelm of JLL.
“We’ve seen a slight uptick in requirements for crane-served manufacturing facilities, which is something of a leading indicator that companies are anticipating new energy products coming in that will require the manufacturing of equipment for that type of operation,” he says.
Energy Contributions
Houston’s evolution as a nexus of distribution adds another layer to the market’s economic identity, which for decades was heavily defined by the performances of oil and gas.
As it happens, these commodities are experiencing a runup in prices concurrent with growth at the port and southeast submarket. As of Friday, April 22, the latest data available at the time of this writing, the price of West Texas Intermediate crude stood at $104.10 per barrel, up roughly 70 percent from $61.43 per barrel a year ago.
Yet sources say that even after five years of sub-triple-digit energy prices, these users are not madly rushing into expansion plans.
“With regard to the energy runup, tenants do remember when not so long ago oil was trading at a negative number,” explains Maner of Stream Realty Partners, who agrees that an increase in demand for crane-served industrial product is a reliable indicator of growing demand from users that service the oil and gas industries.
“If you were depressed then, you’re ecstatic now, but most C-level executives in that space are being cautiously optimistic,” he continues. “There’s a sense of making hay when the sun shines and being opportunistic when prices are good, but it’s been a measured approach.”
Stream Realty Partners, in a joint venture with Principal Real Estate Investors, is developing Portside Logistics Center, a 1 million-square-foot project in Baytown. Demand for large-scale facilities continues to grow around the port as more product passes through its channels.
“There’s been volatility throughout this cycle, but we generally hear that if the price of $80 per barrel on oil is sustained, demand for space from these companies will increase,” adds Littman of Cushman & Wakefield. “We’ve seen more inquiries from users over the last 60 to 90 days, as well as from steel companies, which also speaks to growth in crane-served requirements.”
R.D. Tanner, Port Houston’s senior director of real estate, notes that a lot of port-related activity from the energy sector is currently tied to green energy projects. These initiatives include initiatives to produce and distribute green products with a wide range of applications, such as green diesel, ammonia and hydrogen. Yet beyond that segment of the energy market, Tanner concurs that new leasing and development activity has been muted.
“Other than the green sector, there’s still quite a lot of hesitation in terms of the energy outlook — that’s what we’re hearing from our clients and prospects,” Tanner says. “Many of our sites require tens or hundreds of millions of dollars to develop and operate, and to invest that kind of money, you need long-term horizons on whether you can get your money back or not.”
Yet Tanner does observe some positive indicators for the marriage of real estate and energy usage at the port, namely permitting issuances in the Permian Basin. According to Bloomberg, more than 900 drilling permits were issued in this region of West Texas in March, an all-time monthly high that coincides with mounting political pressure to increase domestic oil production and help consumers save at the pump.
When that [level of permitting issuance] happens, downhole pipe gets imported, and we’re one of the first groups to see what goes into those projects for exploration,” says Tanner. “So we see firsthand what’s happening with barrel production.”
Head North
If there’s one component of the economic and industrial machine that is Port Houston which is not growing, it’s available land for new development. With large-scale, buildable sites and stabilized facilities south of the ship channel almost entirely occupied or spoken for, developers and users are increasingly being forced to target sites north of the channel.
As demand for industrial space in this area rises, new infrastructure projects are being undertaken and delivered to reduce transit times and costs for getting product off ships and into facilities north of the channel. Construction of the southeast portion of State Highway 99 (the Grand Parkway) is nearing completion. This project will connect the Fred Hartman Bridge (State Highway 146) to Interstate 10, providing immediate entry for trucks loaded with cargo from the port into Houston’s urban core.
“Both large-container terminals are located south of the ship channel, and that’s important because for a long time, anything north of the ship channel was seen as a sort of inferior location,” says Maner. “If you needed rail service and a lot of land, you’d go to the north side and sacrifice that proximity to the ship channel. But with the expansion of Grand Parkway, being north of the channel is no longer an inferior location.”
Maner concedes that there are some availabilities south of the ship channel for tenants with smaller requirements. But for the larger deals that have become one of many symbols of the overall growth of the port submarket, that’s simply not the case.
“If you have a requirement of 480,000 square feet or greater, you can’t lease space south of the channel — there are zero options,” he says. “If you’re at 250,000 square feet and have options north and south of the channel, regardless of what industry you’re in, you’ll probably opt for the south side. But those spaces are being gobbled up very quickly, and rates continue to climb.”
Sources have little dissent on this subject as pertains to the submarket as a whole.
“We looked at 2021 numbers in the submarket and saw some records,” says Talhelm. “Total net absorption of warehouse space was 25 million square feet. At the start of the new year, there was 15 million square feet of new space under construction, and the vacancy rate was about 7 percent. So absorption is clearly outpacing new construction.”
To alleviate some of the stress on rent growth and vacancy rates, industrial users in northeast Houston are looking more at value-add plays for older properties. This strategy is most commonly employed with short-term deals for logistics companies that need space immediately and don’t want to commit to long-term leases since their contracts with manufacturers and retailers often only run for two to three years.
— This story originally appeared in the May 2022 issue of Texas Real Estate Business magazine.