Despite Energy Sector Pain, Houston’s Robust Chemical Industry Offers CRE Opportunities

Houston’s commercial real estate sector, and particularly the industrial submarket, is expected to benefit from the anticipated growth of the petrochemical industry along the Gulf Coast.

Upstream energy companies have been struggling this year with the combined impact of the coronavirus on global energy demand, as well as a recent oil price war between Saudi Arabia and Russia. In contrast, the chemical industry has not suffered quite the same level of supply and demand shocks over a short period of time.

“The chemical industry is more diverse in its products, and the demand for those products,” Economic Alliance Houston Port Region President and CEO Chad Burke said during a Bisnow webinar Tuesday.

Burke said that in the last five to six years, millions of square feet have been constructed along the Houston Ship Channel to accommodate the processing of resins and plastic pellets. Overall, Burke estimates there has been about $100B in expansion activities for those products along the Gulf Coast over the past eight years.

Port Houston is already a major conduit for the export of chemical products overseas. Despite the impact of the coronavirus on the global economy, the number of large vessels entering and leaving the port during the first quarter was on par with a year ago.

“The number of ships that are moving in and out of the Port of Houston, on the whole, have not been affected yet,” Burke said.

Cheap natural gas feedstock for chemical production, anticipated population growth and Houston’s proximity to the Panama Canal are all expected to boost chemical manufacturing and logistics activity in the region over time, which in turn will drive more demand for industrial warehouse space.

“Our belief is that the industrial market, particularly the distribution sector of the industrial market, is going to remain one of excess demand in the future,” JLL International Director Bruce Rutherford said.

The outlook is less positive for upstream oil and gas, at least in the short term.

Houston’s ailing energy sector endured a huge blow Monday, as West Texas Intermediate crude oil prices plummeted into negative territory and closed the trading day at -$37.63 per barrel. That kind of price movement is unprecedented.

“The oil traders have literally had to reprogram their computers because the computers couldn't conceive of a negative price,” Rutherford said.

When commodity prices go negative, it usually means there is too much product available, and not enough buyers. Instead of a customer buying crude oil from a producer, that same producer is paying somebody to take its oil away.

The extreme price dip was exacerbated Monday by the fact that the trading of future oil contracts for May was concluding. Oil traders found there was no available storage left in the Permian basin. With so much oil on hand and a pressing deadline, prices fell dramatically as traders sought to rid themselves of product.

As national crude oil reserves continue to build and global demand remains unusually low, there could be more dramatic price drops.

“The unfortunate thing about this is, this may not be the last time we see this,” Rutherford said. “May 20 is another contract expiration date. We may see the same thing, and even worse, on May 20.”

Rutherford said that at current production levels, the U.S. is between 15 and 30 days away from all conventional crude oil storage in the U.S. being full.

Companies are now resorting to storing oil in unused railcar tankers, in and around refineries, as well as on unused barges. Overseas, some producers are storing oil on unused ocean-going oil tankers.

“We're talking about a lot of oil piling up, and it illustrates how finely tuned the supply chain for oil was in the past, and how this much disruption can be so difficult to deal with,” Rutherford said.

Converting warehouses to store physical barrels of crude oil is not a viable option. Rutherford said that while it had been done before, it is an extremely expensive way to handle large volumes of oil. It is also dangerous, because of the risk of a spill and subsequent fire.

“That's not the way to store oil, certainly in the bulk that we're talking about,” Burke added.