Demand For Industrial Space Near Port Houston Is Growing, Driven By Consumer Goods

Cargo volumes flowing through Port Houston are on the rise, shaking off the early pandemic slowdown in global trade. That's having a positive domino effect on the surrounding industrial real estate market, as third-party logistics firms look to move increasing volumes of consumer goods.

Despite the adverse effects of the coronavirus pandemic on global commerce, Port Houston handled virtually the same amount of container cargo last year as it did in 2019. The port handled 2,989,347 twenty-foot equivalent units, or TEUs, in 2020 — only 828 TEUs less than in 2019. The recovery in volume was particularly strong in the fourth quarter, and Port Houston recorded its highest month ever of container volumes in October.

The trend appears to be widespread: Major ports across the U.S. saw volume recovery in the second half of 2020. The Port of Los Angeles handled 9.2 million TEUs last year, a decrease of 1.5% from 2019 volumes but still the fourth-highest volume year in the port’s history. The Port of New York and New Jersey has not released its full-year numbers, but noted that cargo volumes in November were up 23% from 2019.

The strength of Port Houston’s cargo volumes is partly a reflection of the demand for consumer goods, which make up a significant share of imports. Amid the rising use of online shopping and e-commerce services, that demand is translating into a strong appetite for industrial real estate around the port, particularly from third-party logistics firms.

CBRE Senior Vice President Faron Wiley said that in the second half of 2020, he saw between 10 and 12 third-party logistics leasing deals in the vicinity of Port Houston. He estimated that the average deal size ranged between 100K SF and 150K SF.

“For the most part, it is sort of just traditional warehouse use. They have come to town with a very short lead time. They want to be in and occupied, and in many cases, the goal is being occupied in less than 30 days, which is unusual,” Wiley said.

Wiley said he has seen a recent uptick in activity from Chinese 3PL companies that already have a base in California. In some cases, those firms operate as the logistics arm of major consumer goods manufacturers in China, handling the U.S. distribution of e-commerce products.

The flurry in activity from 3PL firms during 2020 is a continuation of a trend that has been happening for years, but Wiley noted it remains unclear as to whether these firms are simply suppliers for Amazon’s expanding operations or whether they are actually part of an alternative distribution network that is competing with the global e-commerce juggernaut.

Port Houston has long been a hub of energy and petrochemical-related exports from the Gulf Coast, and Wiley said the majority of industrial square footage around the port remains dedicated to those users.

With so many 3PL companies looking to expand near the port, there has been noticeably more interest in firms looking to buy property for build-to-suit facilities, according to Stream Realty Partners Vice President Jeff Pate.

“One thing that we are seeing across Houston, and … this applies to the port as well, is you are seeing some larger users who are in the market looking to purchase property for themselves,” Pate said.

The southeast Houston submarket, which includes a wide swath of area around the Houston Ship Channel, has an industrial inventory of about 113.2M SF, according to NAI Partners’ Q4 2020 industrial report. The vast majority of that inventory is warehouse or distribution space, amounting to 92.6M SF, while manufacturing inventory sits at about 17.8M SF.

Pate said Stream tracks about 44M SF of Class-A institutional-grade industrial product around Port Houston. That figure represents a 20% increase in Class-A space over the past five years, up from 30M SF in 2016.

“More specifically, we tracked over 4M SF that delivered last year, and 3M SF the year before. So we've certainly seen a lot of growth in this market over the past two to five years,” Pate said.

Houston saw a record-breaking 30.3M SF of industrial product deliver during 2020, leaving the city with a short-term glut of supply that could take as long as two years to fully absorb. Most of that product was approved prior to the pandemic, with the expectation that distribution, e-commerce, manufacturing, construction and energy-related firms would continue to expand and need that additional space.

Pate said that because of all the industrial product that has been delivered, developers are being more cautious in putting new projects on the ground. As a result, the development pipeline around Port Houston is now around 1.2M SF, a significant slowdown from the 4M SF that delivered in that area in 2020.

“We've certainly seen the development cycle slow a little bit, not because we believe that the demand fundamentals have deteriorated or anything like that, [but] more because the market is having to work through all of that supply that has come to the market over the past two to five years,” Pate said.

Available industrial inventory around Port Houston varies. Wiley and Pate both said that there is limited infill space available in the area to the south of the Houston Ship Channel, which is bordered by Highway 225 to the north and Highway 146 to the east.

“I would say that south of the Ship Channel ... the demand is higher, closer to the container ports. So as you get farther away from the container ports, there's more supply because you have more land. But when you decide you want the south of the Ship Channel, those supply areas are pretty tight,” Wiley said.

Consequently, new industrial development near Port Houston is starting to shift northeast of the Houston Ship Channel, into Chambers County.

“As you really kind of drill into the market and recognize there's not a lot of land availability left in that infill market, you will see more and more of the future development moving north of the Ship Channel into Chambers County. And that's kind of one of the big themes that we're certainly tracking in this market,” Pate said.

The future development pipeline around the port could still have another 5M SF to 6M SF, based on land positions that developers hold in the area. Pate noted that while there’s no guarantee that those projects will eventuate, much of those holdings are northeast, in Chambers County.

Industry experts have previously said that Houston’s industrial sector is still in the early stages of ramping up to meet e-commerce demand, lagging behind major logistics hubs like Dallas. Industrial projects across the city are getting consistently bigger, thanks to major players like Amazon and Ross Stores, and Houston’s growing population is expected to fuel the need for large warehouse and distribution centers.

Pate said that from his perspective, it felt like there were larger industrial leasing deals across the city in 2020, as much of the speculative product developed and delivered was designed with larger users in mind.

“I think that speaks to the expectation of these 3PL companies and their needs for larger storage capacity,” Pate said.

Wiley said that despite the high volume of deliveries in 2020, industrial absorption in Houston during 2021 will be significantly larger than usual. Houston’s industrial vacancy figures are estimated anywhere between 6% and 9%, but that should fall by the end of the year, he added.

“I expect Houston to have a huge 2021. We've been absorbing about 10M SF a year. We think that number is going to be north of 15M SF in 2021,” Wiley said. “My expectation is that when we get to the end of [2021], we'll be back to our trend line on vacancy.”

As for the port, Wiley anticipates that Amazon will start looking at property in the southeast submarket, primarily to get closer to rooftops on that side of the city. The firm has so far preferred to situate its facilities in northwest, west and southwest Houston, but as more consumers opt for online shopping, there is a growing need to service rooftops to the east.

“I do think that because of COVID, they're going to pursue opportunities east in the near future,” Wiley said. “I don't expect them to build near the port for the sake of the port. I expect them to build east for the sake of rooftops, and for the sake of being closer to the consumer.”