By Travis Secor, senior associate, JLL
Nationally, e-commerce and warehouse supply have been the center of the industrial real estate conversation. It’s easy to get lost in the latest data related to the impact of COVID-19 and speculation on where a major online retailer’s newest distribution centers will land.
Houston has received its share of the industrial real estate spotlight over the years. The narrative over the past decade will tell a story about the wild vacancy swings experienced through each development cycle, always in perfect harmony with the boom-and-bust oil reputation the city has crafted over the years.
Travis Secor, JLL
Current headlines highlight the possibility of another major glut in warehouse supply resulting from our latest development binge. While the case for an overbuilt market has major validity, you cannot broadly paint Houston’s industrial sector like that.
To understand the complexities and nuances of Houston’s industrial market, it’s important to know the unique personalities of each geographic submarket and the events that shaped it.
Northeast Houston
When oil prices fell to around $10 per barrel in the late 1980s, commercial real estate professionals might not have been bullish on the absorption prospects for the industrial development spree that had taken place over the previous 10 years. Developers like Trammell Crow, who built Eastport Industrial Park in 1982, must have had a crystal ball.
Today, these Class B buildings with low clear heights and shallow truck courts remain the diesel engine of Houston’s industrial sector. These buildings continue to maintain low vacancy even as rates creep up closer to Class A levels. In 2012, JLL helped a logistics company lease an 80,000-square-foot space for $0.33 per square foot gross. Fast forward to today, similar buildings are leasing for over $0.40 per square foot net.
This infill market is appealing to companies from all industry types that need warehouse space located near both George Bush Intercontinental Airport and the Houston Ship Channel with access to a robust highway system and last-mile delivery capabilities. Developable land along Loop 610 and I-10 is virtually nonexistent.
Prior to 2019, speculative development in this submarket had not received any major headlines for more than a decade. Within the last few years, however, we have seen a new wave of developments come out of the ground in this area, including 8404 East Freeway, Houston Tradeport, Northpoint 90, Market Street Industrial Park and Generation Park.
Southeast Houston
The other side of the channel in southeast Houston has a more recent history of industrial real estate development with a landscape that would be nearly unrecognizable from the early 2000s.
Clay Development was an early pioneer in the area and started construction on what is now called Independence Logistics Park back in 2006. The park was located along Highway 225, or “refinery row,” as some call it.
Third-party logistics firm Dunavant Distribution Group recently signed a 784,000-square-foot industrial lease at Bay Area Business Park in Pasadena. The company cited proximity to chemical manufacturers that utilize Houston’s container ports as a key factor in the move, which illustrates the strong tenant demand that this area is seeing.
Around the same time, Principal Financial had recently constructed Phase I of Bay Area Business Park, which was strategically located in close proximity to the container terminals. These developments, along with a few others, did not lease up as quickly as their stakeholders had projected, but once they caught traction, it was off to the races. Today, JLL is tracking 73 tenants in the Houston market totaling 18.1 million square feet of space requirements. Over a third of these requirements are located in southeast Houston.
Demand for warehouse space in this submarket can be attributed to a multitude of factors. For example, plastics came roaring on to the scene at the same time that energy prices were decreasing, creating cheap feedstocks used to produce resin products.
Many of the chemical plants went through major expansion projects to keep up, and plastics packagers started to gobble up rail-served space across the submarket. When existing rail-served buildings were all leased, these plastics packagers started building their own mega-facilities further east in Baytown, where rail service was even more prolific.
TGS Cedar Port and National Property Holding’s Ameriport are both home to many of the larger plastics manufacturers and packagers in the region. Plastics-related activity remains one of the top user groups in the submarket.
Port Houston has been recognized as the No. 1 U.S. export market in terms of foreign tonnage for 22 years straight. It also has an extensive rail network covering the area, making southeast Houston’s multi-modal transportation options second to none. Barbour’s Cut was the only container terminal at the Port of Houston until 2007 when the Bayport Container Terminal was built, doubling the capacity of container traffic in and out of the port.
Since 2015, Port Houston has experienced 40 percent growth in imports and exports of twenty-foot equivalent units (TEUs) and ushered in new trading partners following the expansion of the Panama Canal. Containerized cargo growth and e-commerce go hand in hand.
According to JLL’s data, Port Houston grew seven times faster than the overall U.S. container port sector in 2019. This growth, combined with the city’s nation-leading population gains, will appeal to national retailers that are now sizing up Houston for their next distribution hub.
Due to the rapid growth over the years, southeast Houston has become a mature submarket, and developers are facing many new barriers to entry. JLL is seeing a scarcity of large developable land tracts in the submarket as a result of the last 10 years of development.
Now that Pasadena and LaPorte have both adopted the City of Houston’s floodplain and detention regulations, future developments will be faced with larger detention requirements that will result in a loss of approximately 15 percent of buildable square footage. With development slowing down, we would expect to see significant reduction in new deal concessions in the next 12 months.
— This article first appeared in the February issue of Texas Real Estate Business magazine.