Houston Industrial Market Has Come to Reflect City’s Economic Diversity
The resiliency of Houston’s industrial real estate market is truly astounding.
Outsiders have always considered Houston to be an “oil town” whose economic success is tied to the geopolitical intricacies of the international energy markets. Yet three years into the oil and gas downturn, Houston has proven that it has a truly diversified economic base. The city’s industrial real estate market has consequently enjoyed a disproportionate benefit of that concerted effort to establish a truly balanced economy.
From 2009 to 2014, while the national economy sputtered along due to anti-business policies of the Obama administration, Houston enjoyed a countercyclical economic boon as all sectors of the oil and gas industry added jobs, increased investment and drove demand for oil service-related real estate. Manufacturers and distributors made significant real estate commitments to property and equipment as they worked to meet the demand for materials and services related to the growth in domestic shale exploration and production.
When the music stopped in November 2014, outsiders and pundits threw their hands in the air, called it the end of Houston’s growth story and declared that it would be the 1980s all over again.
Houston real estate veterans, however, trusted the diversified economy and found ways to meet demand of other sectors as national economic output increased. Without question, the industrial real estate community had issues with subleases and defaults during the energy downturn. However, the expansion of e-commerce, the region’s natural population growth, heightened investment in Port Houston’s infrastructure and increased consumer demand have all contributed to a robust industrial market that truly reflects Houston’s economic diversity and its irrepressible ability to bounce back from adversity.
Growth of E-Commerce
Houston has been a late-comer to the unprecedented growth of e-commerce, but it’s catching up quickly. Not only has the city seen multimillion-square-foot investments by Amazon, UPS, FedEx and others, it has also seen providers for these major distributors seek to establish regional distribution and return centers related to online sales.
Oakmont Industrial Group’s 700,000-square-foot warehouse in Katy exemplifies this trend. The property, which is currently under construction, is being developed on a speculative basis to meet the future real estate demands of e-commerce tenants in our region.
Closely tied to e-commerce expansion is population growth throughout metro Houston. Population growth from 2010 to 2016 averaged more than 2,600 new residents per week. The U.S. Census Bureau projects that the area’s population will double to almost 15 million people by 2050, making Houston a major economic force with tremendous consumer buying power.
While core markets such as Dallas, Atlanta, Chicago and Los Angeles typically meet the need for nationwide distribution, Houston has emerged as a market wherein distributors can be closer to the end users of their products. Houston’s proximity to San Antonio and Austin and relatively soft regulatory environment, as well as its infrastructural assets — the rail network, interstate highway systems and Port Houston complex — all work together to drive demand for industrial space.
Oil Out, Petrochemicals In
Between 2004 and 2015, the submarkets around Port Houston posted the lowest occupancy and absorption rates in Houston. A number of developers built millions of square feet of buildings during this time, banking on the notion that Port Houston’s infrastructural development around container handling facilities, plus the widening of the Panama Canal, would drive demand.
While some success was achieved in that area, true growth in new construction and rental rates is a fairly recent accomplishment. The main impetus for this growth has been the increased output of petrochemical plants, in both chemicals and plastic resins. Abundant energy sources from the domestic oil and gas shale plays around the U.S. have led to more than $50 billion in new plant investment.
Now that the expanded production capability has arrived, logistics providers have taken down almost all new industrial space in Port submarkets — and at rental rates that have provided very solid returns to developers that constructed speculative buildings to meet this new demand.
Also tied to Port Houston is continued growth in container traffic, with consumer products companies such as Walmart, Home Depot and IKEA making significant investments and also considering additional real estate commitments.
There are many statistics that speak to the overall strength of the Houston industrial market. Despite tepid economic growth over the past three years, industrial absorption has held steady as new construction has declined. Houston continues to be a market leader with 95 percent-or-higher occupancy rates and stable rents.
Even with uncertainty in the oil and gas sector, Houston’s industrial market has shown a resilient ability to adapt to continually evolving economic forces. Looking forward, expect continued disruption and growth in the e-commerce arena and heavier reliance on Port Houston’s infrastructure to handle inbound containerized consumer goods and outbound raw material shipments. Houstonians can also expect natural population growth and inbound migration to drive increased consumer spending and eventual stabilization of the global oil and gas economy.
As has been the case for nearly 180 years, Houston’s economy will adapt to changing market forces. Intelligent investors — whether industrial developers, private buyers or entrepreneurs that drive economic growth, — will benefit from betting on Houston’s resiliency.
— By Walker Barnett, principal, Colliers International. This article first appeared in the January 2018 issue of Texas Real Estate Business magazine.