Publication: Texas Real Estate Business
Author: Phillip Wiggins and Christian Nilsson
July 07, 2016
Outsiders looking at the Houston industrial real estate market may automatically presume doom and gloom for all commercial real estate segments due to the significant downturn in the oil and gas industry during 2015 and 2016.
When it comes to the Houston industrial sector, we caution not to jump to that conclusion too fast! In 2016, the Houston regional economy has much more going for it that creates industrial real estate demand than simply oil and gas. Momentum from economic drivers not dependent upon the oil and gas industry are stabilizing industrial real estate. They are also helping counter the drag on the area’s economy that may be attributed to excess inventory and price deflation in oil and gas.
Through the end of the year, we expect activity in industrial leasing to remain relatively stable and to offer rental rates that are comparable to early 2016.
Our confidence in the stability of industrial real estate is partially based on our fundamental understanding about segmentation in the energy industry that directly impacts Houston’s industrial real estate utilization.
Oil and gas is not a simple, homogenous industry with all segments moving in lock step. Clearly, the energy downturn has hit oil and gas exploration and production hard, as well as oil field services. But underlying demand for industrial space remains stable from other energy-related sectors such as midstream and downstream companies, as well as petrochemicals and plastics.
For evidence, as of July 2016 more than $100 billion in chemical plant expansion projects are under development in the Houston area, all users of industrial real estate.
Industrial is Hot
According to Stream, Houston’s eastern industrial submarket is “hot” and has seen its vacancy shrink to less than 5 percent from more than 20 percent in 2007. As a result, we feel that Bay 10 is well positioned to meet demand and supporting this we have seen an uptick in interest in our location in the east side industrial market.
The greatest direct contributor to stable and growing demand for industrial space is the Port of Houston. The Port is also a powerful economic generator for the entire region. This 25-mile-long complex of more than 150 facilities ranks first in U.S. imports, first in U. S. export tonnage and second in the nation total tonnage, according to the Houston Port Authority.
Annual activity includes 200 million tons of cargo moving through the port, carried in and out by more than 200,000 barges and 8,000 vessels. Further fueling future demand for industrial space, the Port of Houston is projected to expand its container ship capacity more than 35 percent in the next five years.
Future trends in international ship ping offer even more hope for growing demand for industrial space in Houston. When completed, the Panama Canal expansion will enable more commerce and larger ships to utilize the Port of Houston.
Houston is also increasing its role as a trans-Pacific gateway. Beginning in June 2016, the first line of 3M Asian vessels made their first call on Houston. To capture more of this large vessel traffic, port channels will soon be deepened and widened to accommodate these larger vessels.
In addition to opportunities related to Port activities, Houston’s industrial real estate market also enjoys the enduring benefit of its location in the middle of the U. S. and its proximity to population centers. More than 17 million people live within 300 miles of Houston and approximately 60 mil lion live within 700 miles.
Connecting the Port of Houston to these population centers is a robust network of interstate and state highways fanning out in all directions, which makes importing and exporting cargo efficient. For distribution of goods unrelated to the port, Houston’s industrial real estate projects are strategically positioned along the east/west and north/south interstate highways, comprising an important domestic logistics hub.
Moreover, much of Houston’s industrial real estate has also been located to take advantage of nearby rail service from railroads such as Union Pacific and BNSF Railway.
Like a number of other industrial parks, our Bay 10 industrial complex offers business owners direct access to both Interstate 10 and the Grand Park way, two of the most important arteries in the east Houston market. Bay 10 also offers nearby rail capacity that can accommodate up to 100 rail cars, rail car cleaning, storage and repair, as well as daily switching.
Even with depressed oil and gas prices, fundamentals affecting Houston industrial real estate are stable. The Port of Houston is clearly the strongest economic generator for industrial real estate. Other benefits — robust multi-modal transportation, central U. S. position and proximity to growing populations — all support the likelihood that of compelling development, operation and investment assets in Houston. Industrial real estate will offer compelling operation, investment and development opportunities now and into the future.