Houston Industrial Sector Remains Strong in Spite of Oil Price Fallout

by Haisten Willis

Holden Rushing, NAI Partners

Depending on who’s speaking, or what you’re reading, the forecasts for the 2016 Houston industrial real estate market run the full spectrum from bull to bear.

Whether you are a landlord trying to fill a vacancy; a developer weighing the decision on whether to build or not; or an investor or a potential tenant looking for the best lease terms, your decision making is driven by a few key factors.

These include the price of oil and where you think it is headed, the type of industrial facility you build/own/require, and in what submarket of Houston it is located.

With current oil prices hovering in the low $30s per barrel, and threatening to go lower, you don’t have to look hard to find plenty of economists forecasting a rough 2016 for Houston industrial real estate. But that’s not the whole picture.

No doubt the ongoing drilling downturn has hit the city hard. A recent survey was conducted of single-tenant manufacturing facilities ranging from 10,000 to 50,000 square feet in the West, Northwest and North Houston submarkets.

The survey reported over 2.4 million square feet available in 120 buildings, with an additional 240,000 square feet under construction in 15 more buildings. The same survey, running an identical analysis on the East and Southeast submarkets, reported only 300,000 square feet available in 16 buildings. This, in a nutshell, is the story of the Houston industrial real estate market for 2016.

The upstream sector of the oil industry, whose largest companies are located predominantly in the West and Northwest submarkets, is reeling from the oil price collapse, putting a halt to all manufacturing and new fabrication.

However, the downstream players in and around the ship channel are taking advantage of 70 percent cheaper feedstock, which has led to a boom in petrochemical-related construction.

At this moment, more than $50 billion in new capital projects are underway in East and Southeast Houston. That number gets even larger the further you go in either direction along the Gulf Coast.

With the refineries along the Houston Ship Channel at the epicenter of this boom, developers and owners with industrial facilities in East and Southeast Houston are looking to capitalize on the increased demand for lease space from the petrochemical companies themselves as well as the assorted service companies who support the refineries’ day-to-day operations.

And it is not only the manufacturing facilities on the East side that are in high demand. Vacant space in area distribution buildings is being leased up as quickly as it can be built, and in some cases even faster.

Leasing Still Strong
First Industrial’s Energy Commerce Business Park, Transwestern’s Port 225, Phase 2 at Stream’s Bay Area Business Park, and The Carson Companies’ Bayport North II have all seen strong activity in recent weeks with several large leases reportedly getting signed before the shells of the buildings are even completed.

Though not all of the tenants signing leases in these buildings are petrochemical related, all of them do have a need to be close to the Port of Houston. With the long-awaited expansion of the Panama Canal set to be complete in May, consumer product distributors and logistics providers are staking their claims on the East side of town awaiting the increased flow of imported goods that will soon be arriving on the first Post-Panamax vessels.

Clay Development & Construction just announced its purchase of almost 80 acres in Trans-Global Solutions Inc.’s 11,000-acre Cedar Port Industrial Park in Baytown for the construction of a 1.5 million-square-foot, rail-served distribution park.

Much like the other developers who are building in the area, low natural gas prices, the Panama Canal expansion and growth in the petrochemical and plastics industries, combined with a scarcity of available space on the East side of Houston, were the key factors behind Clay’s decision to build.

Just because the East and Southeast are the shining stars in the Houston industrial real estate market at the moment, it does not mean that the rest of the submarkets around the city will struggle under the weight of low oil prices in 2016.

As the fourth-largest city in the country, with a relatively steady in-migration of people from other cities, and being substantially more diverse than in past periods of economic uncertainty, Houston will see some benefit from a strong U.S. economy. As a nation we added 292,000 new jobs in December 2015.

Recently completed industrial distribution parks by Trammell Crow Co., DCT and Panattoni Development in Northwest Houston have all seen continued demand, though the pace has slowed a bit since the same period in 2015.

During the last Houston economic boom, ending with the sudden and drastic decline in oil prices, numerous developers broke ground on distribution projects in North Houston.

By standard Houston historical absorption numbers, the submarket did not get overbuilt. However, there remains a substantial amount of vacant and sublease space, around ±5.7 million square feet, available in the area.

Owners of industrial distribution buildings in North Houston can expect the competition for good credit, and even fair credit, tenants to be fierce, with aggressive tenant concessions and lower than pro-forma rental rates being the norm.

In October 2015, Houston fell from the No. 1 real estate market to watch to No. 30 on the Urban Land Institute’s “Emerging Trends in Real Estate United States and Canada 2016” report.

Like every other national report on the Houston economy, their explanation for the dramatic move was based solely on speculation regarding what influence “the fall in the price of oil,” would have on the Houston economy, and specifically the real estate market.

Yes, a strong national economy will only help so much, and perhaps not enough to stave off the effects of a prolonged oil price collapse. Certain product types, such as office and multifamily, are rightfully expecting rough waters in 2016. Bolstered by the explosive growth on the Eastside, the overall outlook for the Houston industrial real estate market still looks good.

— By Holden Rushing, vice president, NAI Partners. This article originally appeared in the February 2016 issue of Texas Real Estate Business.

You may also like