'It's Boom Time Again': Oil And Gas Improvement Spurring Industrial Activity

The price of oil is rising, and the industrial market can lick its chops — an influx of demand for manufacturing space and warehouses is coming with it. JLL Executive Vice President Mark Nicholas has noted a significant increase (his deal volume the last 12 months is double the previous 12 months) that he doesn’t expect to slow down in the near future.

“Houston is in a boom, it’s boom time again,” he said.

Crane-served manufacturing buildings are expected to be in high demand as the energy capital of the world reemerges from the downturn. Demand will also rise for distribution and warehouse space as oilfield equipment manufacturers produce more supplies for downstream companies.

Bisnow will discuss the intersection between the commercial real estate and oil and gas industries on Oct. 4.  

“The price of oil and gas directly affects the manufacturing sector of industrial real estate more than any other [sector],” NAI Partners partner Travis Land said. “When the oil and gas prices are higher, the demand for that equipment and components increase, and when they increase their output they typically need more space.”

In reverse, if the demand for oil drops, so does the demand for manufacturing space, he said.     

According to JLL, 10.6M SF of industrial space is under construction. Of that 10.3M SF is warehouse and distribution space. Much of this development is coming from another demand driver — the proliferation of e-commerce, retail giants and shipping companies entering the market has been spiking activity recently.  

Only 320K SF in manufacturing space is underway. Developers are more likely to build speculative warehouse space than spec manufacturing, which requires a more custom outfitting for each company such as heavy power capability or overhead cranes, Nicholas said.

The demand for spec manufacturing space will increase as the existing space is filled, Land said. Much of this activity will be in East Houston near the petrochemical plants. 

The total vacancy rate for manufacturing industrial buildings was 3.5% in Q2, according to JLL, so there is not a great deal of space to work through before new product is needed. 

The citywide industrial vacancy rate sits at 5.4%, according to Greater Houston Partnership data.

“As long as the vacancy rate stays below 6% then we will be okay,” Greater Houston Partnership Senior Vice President Patrick Jankowski said. If the vacancy rate begins to rise above that threshold, it is a sign that the sector is becoming oversaturated. It has averaged between 4.7% and 5.4% for four and a half years, according to the GHP. 

The strength of the industrial market despite the oil slowdown has been led by the distribution and warehouse sector, Nicholas said. The demand was pushed by building materials, retailers and consumer goods companies. 

The manufacturing sector had slowed, though, because the oilfield equipment companies weren’t producing as much. It took a rise in oil prices to start turning that segment around.

Stabilizing WTI Helping Manufacturing

Oil is now trading above break-even cost for most producers, allowing exploration budgets to increase, NAI Partners Director Leta Wauson wrote in a recent NAI Partners report on the impact of the energy sector on industrial real estate.

“Oil hasn’t shot directly back up,” Land said. “The price of oil has gradually recovered and stabilized. The recovery of the manufacturing sector is following that same trend line.”

Most analysts forecast the price of oil will be between $60 and $70 per barrel through the end of the year, according to the report. The U.S. Energy Information Administration forecasts West Texas Intermediate crude oil to average $66 this year and $64 through the end of 2019.

“All of these factors will pave the way for increased demand in manufacturing buildings,” Wauson wrote. “Many of the large oilfield service companies are back in the market evaluating options, and we expect to see a number of large manufacturing deals done between now and the end of the year. Barring any unforeseen event, we see no end in sight for a healthy industrial market for the foreseeable future.”   

Other Factors: Rig Counts And Employment

Manufacturing employment is skyrocketing. The sector added 6,500 jobs from July 2017 to July 2018 for the ninth conservative month of annual growth, according to the report. Employment in the area improved by 2.9% from July a year ago, compared to 2.6% nationally. 

Employment growth is directly correlated with Texas rig counts, NAI Partners said. Baker Hughes reported 528 drilling rigs were running in Texas during the last week of August, which is up 15.8%, or 72 rigs, from the same week last year. The rig count has trended upward since early November.  

“The local durable good manufacturing industry produced all of the sector’s job growth over the year, with fabricated metal product, manufacturing adding nearly half of the sector’s jobs (+3,100),” Wauson wrote in the report.

No Such Luck For Office

The office sector also relies on activity in the oil industry, specifically from upstream companies leasing space. However, no shift in demand is expected there. Jankowski said the market is horribly overbuilt and will take several years to improve.

He doesn’t expect a jump in employment for exploration companies. During the oil downturn, these companies found innovative drilling techniques that require less manpower. The oil uptick thus is providing little to no boost for office landlords and owners.

Join Bisnow on Oct. 4 for The Impact of Oil and Gas and The Resurgence of The Gulf event at the CityNorth Conference Center.