Not The Same 'Super'markets: New Industrial Stronghold Emerges In Houston

The northern industrial strongholds have finally recovered from what NAI Partners partner Travis Land described as a 2015 bloodbath. 

With industrial activity booming in Houston, the market has absorbed the oversupply and ushered in a new pipeline of new supply. Meanwhile, the traditionally conservative southwest submarket has emerged as the new kid on the block. The overall healthy industrial activity is partly due to the balanced return of the energy sector. 

"It has been a slow and steady climb back," said Land, who is speaking at Bisnow's Industrial & Logistics Outlook Jan. 29. "It was [a] two steps forward and one step back recovery.”

When oil pricing began dropping in 2014, the northern industrial markets were hit the hardest. Due to its close ties with the oil industry, the availability of manufacturing space skyrocketed. Fewer renewals and more sublease space hit absorption numbers, Land said.

Concurrently, the delivery of new spec distribution space drowned the market.

By the end of Q2 2016, the total available space in the north submarket climbed to 8.6M SF and the vacancy rate reached 8.7%, according to NAI Partners’ quarterly market report. The northwest market had 9.2M SF of available space and the vacancy rate stood at 5.9%.

In total, there was more than 19M SF of available industrial space in the northern markets compared to about 9M SF in the southern markets. 

Since that low point, much of the available space has been absorbed, Land said. Total vacancy stands at 5% in the northern submarkets and the amount of available space has dropped to about 2M SF.

Nearly all of the new development is spec distribution space, not manufacturing, which is a good sign for the industrial market facing another recent oil price dip, Land said. He said the 2016 energy downturn proved that Houston’s market is becoming less reactive to the volatility of oil prices, and he does not project market contraction unless oil prices remain suppressed for about a year.

“The longer [oil] stays below $50, there will be minimal expansion of existing companies,” Land said.  

More than 6.2M SF of warehouse space is under construction in the north, but the demand has been tied to the growth of e-commerce suppliers and Port Houston activity.

Despite its past troubles, northwest is still by far the most sought-after Houston market. The problem is the lack of quality sites, Land said.

Large distribution end users are attracted to the submarket due to its proximity to three suburbs: Katy, Cypress and Tomball. Plus, the completion of Highway 290 will unlock the Waller area.

Davis Commercial Development and Crow Holdings are among the developers that have made a major investment in North Houston in the last few weeks.  

Cypress Preserve Logistics Center, a 560K SF spec industrial park near Interstate 45 and FM 1960, will feature flex space from 65K SF to 285K SF and target logistics and e-commerce providers.

Layne Crossing, a 530K SF industrial spec development, will feature six industrial warehouse building ranging from 56K to 174K SF. 

Going forward, more build-to-suit and design-build deals will emerge as companies seek more specialized warehouse layouts and functions, Avison Young Vice President Grant Hortenstine said. He noted Plastic Bagging & Packaging and Valvoline as companies that secured their long-term supply chain commitments and maintained control of their spaces by inking large distribution space deals recently.

Chicago-based Logistics Property Co. is entering the Houston market but not in a submarket you would expect: Its first project here is in the historically underserved southwest market. CityPark Logistics Center is a 97-acre spec industrial business park between Harris and Fort Bend counties. 

After researching the competition, Logistics Property Senior Vice President Bob Wheless noted a demand for space for small tenants in the southwestern towns. 

Three of the seven proposed buildings at CityPark, which will total 1.68M SF at build-out, will include two 180K SF buildings and an 80K SF building. The bigger buildings are projected to accommodate two tenants and the others are marked as single-tenant, but all of the assets can be subdivided if necessary. 

Wheless will discuss the company's future Texas expansion during Bisnow's Industrial & Logistics event Jan. 29.

Final Group's Independence Business Park, a 145K SF spec industrial site, is another spec business park headed to the southwest. The park will cater to midstream and downstream firms looking for space between 17K SF and 27K SF.   

More than 907K SF of distribution space was under construction at the end of Q4 2018 in the southwest market, a significant increase from 47K SF in Q4 2017. No manufacturing buildings have recently broken ground in the southern submarkets.  

While developers flock to break ground on major projects in the southwest, Avison Young principal Bob Berry is keeping his eye on the potential of oversupply and the ability to quickly absorb in a normally underrepresented industrial market.

“I am concerned with the amount of product being built down there,” he said during a press breakfast. “As long as they can get capital they are going to build. That is why you have so much product being built.”

Attend Bisnow's Houston Industrial & Logistics Outlook Jan. 29 at the Westin Galleria to find out the emerging industrial submarkets and learn about attention from national players looking to enter the market.