Third Terminal Could Be On The Way At Port Houston As Supply Chain Reshuffle Sends Growth Soaring

Traffic is up nearly 25% at Port Houston so far this year amid what one commercial real estate observer called a perfect storm of global transportation and supply chain pressure.

Now plans are afoot to deal with the unprecedented volume of cargo pouring into the city, including construction of a third container terminal to serve the port.

“We’re dealing with new shipping behaviors and a substantial increase in volume we haven’t seen before, and that’s forced us to put our foot on the gas,” Port Houston Economic Development Manager Rina Lawrence said Tuesday after discussing the proposed new terminal late last week at Bisnow’s Houston Industrial & Port Development event held at the Westin Houston Memorial City.

June marked Port Houston’s fifth month this year of double-digit growth over 2021, which was itself a record year for container volume, the organization announced earlier this month. Through June, Port Houston handled just under 2 million twenty-foot equivalent units, or TEUs, an 18% increase over the first half of last year.

“We’re receiving cargo from other ports as shippers shift their supply chains,” Lawrence said. Talk of a third terminal to supplement terminals at Barbours Cut and Bayport had been bandied about for some time, but Lawrence said the onslaught of containers being rerouted to Houston from the coasts has accelerated plans. 

“We’re having to expedite everything,” she said. “We’ve made improvements but that isn’t enough.”

This month, the Port Commission authorized more than $150M to beef up infrastructure and operation of the Houston Ship Channel and Port Houston, including $40M to purchase three dockside electric ship-to-shore container cranes for Bayport Terminal and $65M to buy 26 new hybrid-electric rubber-tired-gantry yard cranes for use at both facilities.

In addition, Port Houston and the U.S. Army Corps of Engineers are in the process of expanding the Houston Ship Channel from 530 feet to 700 feet, a $1B project aimed at making way for larger and more numerous vessels.

Lawrence said the port is on a tight timeline to step up its ability to deal with large increases in container flow. The terminal project was put up for bid over a month ago, and the bidding period is expected to close Wednesday.

The scope, location and cost of a third terminal are still unknown as the project remains in a discovery phase while Port Houston sifts through the various bids coming in this week. But, Lawrence said, once the contract is awarded, work could get underway quickly.

“Once it kicks off, the time frame to get going is pretty aggressive,” she said.

In a statement Tuesday, Aug. 30, Port Houston cautioned it had made no decision about the time frame for a third terminal or whether it would definitively move forward with it.

"Once the contract is awarded, we will see where this study will take us," the statement read." This is a complex process that takes many years of planning. There is no definitive time frame as to when we will actually break ground or if we will even move forward with a third terminal. Time will tell."

Much of Houston’s newfound appeal as a destination port comes at the expense of West Coast ports, Trammell Crow Senior Vice President George Farish said at Bisnow’s Aug. 18 event.

Farish pointed to stacked-up containers, particularly at the ports of Los Angeles and Long Beach, rail issues that just last month delayed $1.5B in goods from moving for days, and labor issues compounded by California’s Assembly Bill 5, which targeted the trucking industry's use of independent contractor owner-operator drivers and has led to protests that have paralyzed ports.

“I don't want to browbeat California. I know Texans love to do that. But I think this past year or so has continued the theme of California's pain is Texas’ gain,” Farish said. “You really have this perfect storm of multiple modes of transportation in crisis all at the same time. And Houston and Texas in general has been the net beneficiary because we don't have really any of those issues.”

And Houston offers land, at least in comparison to California’s Inland Empire where industrial vacancy sits at an all-time low of 0.2%, per CBRE. Meanwhile, at least four cities in that region have banned new warehouse projects and eight have enacted a moratorium on new projects in the last two years, citing the impacts of dense industrial use on residents.

That has opened up major opportunities for Houston, which offers relatively fewer land constraints, an easier entitlement process and what looks like a luxurious 2% to 4% vacancy rate in the submarkets surrounding the port. While land near the port is getting scarcer, new gateway markets are opening, such as Generation Park and TGS Cedar Port in Baytown.

Panelists said very few developable sites remain available on the south side of the ship channel, which has pushed a new wave of development to the north as well as east of the Fred Hartman Bridge in Chambers County. 

“I think we are going to continue to see more distribution centers move further and further out from Houston and surrounding areas as the rooftops  pop up out there and [as] the Grand Parkway [is] completed,” Lawrence said.

CenterPoint Properties Senior Vice President Rives Nolen said Houston was slower than other metros to emerge from the pandemic, but points to the latter half of 2020 as the moment the city’s industrial revolution began. Some of that was driven by growth in the oil and gas and petrochemical industries, the rise of e-commerce during the pandemic and the same supply chain corrections being implemented nationwide.

But what has really kick-started growth is availability of land for super sites, large-scale distribution centers with high clear heights and plentiful trailer parking, and access to affordable labor.

“We haven't historically thought about location, location, location in terms of labor,” Farris said. “And now that is becoming one of, if not the, most important issues that e-commerce companies are looking at because the last thing they want to do is lease a 1M SF building and then not be able to fill that building with workers at wages that they underwrote. If you look at the data right now, Houston is one of the most inexpensive places to live of all major cities in the country. We're a business-friendly city, [companies] expect there will be low taxes — all those things are factoring into the calculus for these big-box users.”

Houston is doing its own calculus on how fast its industrial market can grow.

Global trade hit a record high of $28.5T last year and was at $7T in the first quarter of this year, up $1T over Q1 2021. But growth is expected to slow from 6.1% last year to 3.2% by the end of this year, per an International Monetary Fund analysis last month. The IMF pointed to a weakened global economy, continuing fallout from the pandemic and Russia’s invasion of Ukraine for its gloomier revised outlook.

That could apply some brakes to the velocity of Houston’s expansion, said Warren Hitchcock, senior vice president and senior director for debt and equity at NorthMarq. Hitchcock warned that in today’s environment, cost expectations have to be higher, sites must be better and underwriting needs to be top-notch to get projects done. The Federal Reserve’s moves to balance inflation by increasing interest rates have shaken expectations in the near term.

“That's really what's weeding out a little bit of what's happened in the marketplace and quite honestly, I think that there's been 24 to 36 months of rapid development and lots of investment from the capital side,” Hitchcock said. “And this is an opportunity to take a pause, let some of these market dynamics shake out and kind of see where things end up … There's still a lot of price discovery in the marketplace, but I'm starting to see some optimistic signs here, starting now and going into Labor Day.”

Nolen said what had become a bubble is deflating somewhat, given nerves about a possible deeper recession, increasing construction costs and general uncertainty despite persistent strong demand. 

“I think the takeaway from that is you're probably going to see development slowed down significantly, despite the fact that the demand picture looks good,” he said. “But ultimately, it's all going to come down to supply and demand, if the fundamentals stay strong and the rent growth is there to support the underwriting. As the dust kind of settles on the cap rate, you get a little bit better visibility, the capital is going to come back and we'll start building again.”

CLARIFICATION, AUG. 30, 4:35 P.M. ET: This story has been updated with an Aug. 30 statement from Port Houston clarifying no definitive timeline for a third terminal has been set and that it is evaluating when and whether to build the terminal.