Led By E-Commerce Growth, Demand For Houston Industrial Space Outpaces Supply For The First Time In Years
Strong demand for consumer goods, rapid population growth and a global supply chain strain that handed Port Houston a unique opportunity to capture traffic from the backed-up Ports of Los Angeles and Long Beach are converging to make Houston a prime destination for e-commerce tenants.
The market has been burdened by a glut created by tens of millions of square feet delivered in 2019 and 2020, but panelists at Bisnow’s Houston Industrial Boom event Oct. 19 said demand for industrial space is finally outpacing supply. And despite persistent building materials price fluctuations and a labor shortage that are impacting budgets and timelines, the good times are likely to keep rolling. JLL Houston Executive Vice President Mark Nicholas noted his firm is tracking 20M SF of tenants in the market going into 2022.
That is just demand that can be quantified, he said.
“We're not going to see any slowdown regarding e-commerce or people’s spending habits,” he said. “They're not going to change; if anything, they’re going to continue and do more of it.”
Nicholas said he has never known a better time for the Houston industrial market, which has the second-greatest volume of new product under construction in the country, 28M SF, after Dallas at 32M SF, which he attributed to rapid population growth in both cities.
JLL’s most recent quarterly report showed leasing volume in the sector climbed to 10M SF for a total of 31M SF so far this year, vacancy fell to 8.6% and net absorption hit 9.5M SF — a three-month figure that matches the average square footage absorbed in an entire year over the past 10 years.
“And it's obviously because of the e-commerce big-boxes, right?” Nicholas said. “I mean, the six or seven million-square-footers, and then another eight or nine between 500K and 1M SF. It's the big boxes that are finally here.”
Davis Commercial Development principal Jeffrey Davis cited a statistic that Americans currently spend 18% of their shopping dollars online. That is projected to grow to 22% over the next several years.
“I don't have a good statistic about how much that equates to in terms of warehouse space,” Davis said. “But I know the old ‘just in time, barely have enough inventory’ doesn't work anymore. We've all come to realize we need toilet paper in that warehouse when we want it.”
Many of the largest leases signed in the most recent quarter were with e-tailers, including pet supplier Chewy.com’s 690K SF deal at Northpoint 90 Logistics Center and a 629K SF lease at Prologis Presidents Park for an unnamed e-commerce user. Meanwhile, record volumes of cargo are flowing through Port Houston as retailers and their suppliers seek to expand and diversify U.S. distribution networks, a development several panelists called a game-changer for the region and its industrial fortunes.
“We're hitting on all cylinders,” Davis said. “We're adding tremendous numbers of jobs, the port is being deepened and widened, and the container traffic is setting record numbers. And those are incoming containers, which are really good for Houston because we used to be all about the outgoing plastics in those containers.”
That isn’t to say there aren’t headwinds. The year has seen a 15.5% decrease in construction activity due in large part to higher materials costs and supply chain issues creating building delays.
Steel prices have stabilized somewhat, panelists said, and delivery times have fallen to 26 weeks after reaching a peak of 32 weeks. But that is hardly cause for celebration, given steel prices have gone up 146% over the past 18 months, E.E. Reed Construction President Mark Reed said, based on a recent comparison of a 1M SF industrial project launched last April and a similarly sized one his company recently priced out. Reed said the price of concrete has gone up 5% since that time, doors and frames by 18%, glass and glazing by 20%, wood plastics by 23%, overhead doors by 36% and sprinkler pipe by 41%.
“If I ever thought I'd lose a night’s sleep over rollers for overhead doors, I would have thought you're crazy, but that's been the topic of the year,” he said.
Hiring enough people to get industrial buildings constructed is also causing delays and headaches, panelists said. Finding skilled laborers such as electricians is especially challenging — according to Reed, Houston is losing many such workers to the Austin area, with Tesla’s gigafactory site in particular “gobbling people up left and right.”
But even unskilled labor is becoming hard to come by, according to RE/MAX Commercial principal and associate broker Patrick Buckhoff, who is watching some of his clients who previously had applications flood in for jobs paying $14 an hour now struggle to get a single applicant after upping wages to $18 an hour.
“You start scratching your heads,” he said. “It's yet another example of inflation in the market.”
Increased costs and uncertainty of the supply chain and labor market are significant issues that several panelists said are scary in terms of pricing properties and setting rent.
“But we’ve got to build,” Hunt Southwest Senior Vice President Robb La Montagne said. “The demand is there and we'll figure it out later. You know, let's just get the tenant.”
