IF YOU BUILD IT…
E-commerce, spec industrial drive dreams of full occupancy.
Industrial developers doing business in the Houston area appear to be using a strategy that paraphrases the iconic, “If you build it, he will come” line from the 1989 Kevin Costner baseball-weepie “Field of Dreams” by turning “he” into “they.”
The operative question, of course is, for how long?
The Houston industrial real-estate market’s second-quarter vacancy rate rose to 6.1 percent from 4.9 percent a year earlier as the 6.2 million square feet that came online since March outstripped the 2 million net square feet that were absorbed by new tenants, according to real-estate brokerage JLL.
More tellingly, 57 percent of the new square footage was built on a speculative basis, though 15 percent of that inventory became spoken for between groundbreaking and delivery.
“Right now, there are three buildings under construction over 600,000 square feet,” said JLL Senior Vice President John Talhelm, whose work in the Houston area dates to 1985. “That’s the first time that’s happened since I’ve been in the business.”
Driven largely by the e-commerce boom that’s impacted all U.S. industrial markets, industrial real-estate investment has been further spurred by the combination of a local population boom, a ramp-up from a relatively fallow period spanning from 2014’s oil-price crash to 2017’s Hurricane Harvey, and additional efforts to serve Austin’s surging population base.
The result has been a recent spate of building deliveries that has pushed the Houston industrial market to more than 430 million square feet, marking a 13 percent jump from the 379 million square feet in the market five years ago, when vacancies stood at 4.6 percent, according to JLL. Of the 55 largest U.S. markets tracked by JLL, Houston’s ranks No. 9 (Chicago is No. 1 at about 1.2 billion square feet) and secondlargest in Texas to Dallas-Fort Worth’s 614 million square feet.
Recent building completions have also driven Houston’s industrial vacancy rate above the 5 percent national average, though it remains below the 7.3 percent vacancy rate in the Dallas-Fort Worth market, according to JLL.
“Any time you see a new record in deliveries, you watch it closely with a healthy level of concern,” said Hans Brindley, vice president, market leader for Liberty Property Trust’s Houston region.
Concern, and optimism
Developers are balancing that concern with optimism, however, as demand has jumped from tenants and users outside of the oil and gas sector that’s traditionally associated with Houston. During the second quarter, C&S Wholesale Grocers’ Grocers Supply division took possession of a 728,000-square-foot built-to-suit property developed by Liberty Property Trust in north Houston, while specialty-retailer Conn’s is slated to take possession of a 657,000-square-foot build-to-suit building at Liberty Property Trust’s building Houston Distribution Center in north Houston next month.
Meanwhile, in February, Home Depot agreed to take 771,000 square feet at Hines’ Grand National Business Park that’s being built just west of Sam Houston Race Park in northwest Houston.
Developers insist that the risks inherent with speculative projects are calculated ones. Brindley noted that Liberty Property Trust, which is building a 156,000-square-foot property on spec near the Grocers Supply site, started construction of its 600,000-square-foot Port Crossing Commerce Center on spec but inked two leases to fill it — Valvoline took 472,000 square feet — by the time the project was completed earlier this year.
Meanwhile, Hines has four speculative buildings at Grand National Business Park, but more than 70 percent of the 1.2-millionsquare-foot project is spoken for, including Home Depot and the 85,000 square feet that will be occupied by Empower Pharmacy
In fact, Hines was aiming to build a 2.1-million-square-foot business park on land it owned in Katy before Costco acquired the 150-acre parcel late last year for a proposed distribution center.
“We’re building over 3 million square feet at the same time,” said Hines Managing Director Charlie Meyer. “It’s a little daunting to think about, but when you consider the level of pre-leasing and activity, it feels really good, and, frankly, I wish we could find further opportunities. The market seems to be there for welllocated, modern buildings.”
Catching up
Talk to Liberty Property Trust’s Brindley and the strategy is less about optimistically plowing headlong into the future and more about sensibly catching up with the past. With crude oil prices plunging more than 79 percent between mid-2014 and early 2016, retailers may have been scared off by the energy sector’s impact on the overall
“When the oil market dropped, we got a little cautious. Somehow, we were behind the curve. Whenever markets were getting e-commerce buildings, we weren’t. Now we’ve gotten them.” Hans Brindley, vice president, market leader for Liberty Property Trust’s Houston region
local economy.
Add that to the collective pause caused by 2017’s Hurricane Harvey, and developers, retailers and logistics companies alike are merely adding the appropriate square footage to meet pent-up demand after often using industrial space in the larger Dallas-Fort Worth market 250 miles away to meet storage needs. Speaking at the Cy-Fair Houston Chamber of Commerce general membership luncheon in late May, Patrick Jankowski, senior vice president of research at the Greater Houston Partnership, said the region has “pretty much recovered” from Hurricane Harvey and that rising vehicle sales are further proof of a thriving local economy.
Additionally, the local population continues to rise. Between 2010 and 2018, the Houston-The Woodlands-Sugar Land area’s population jumped more than 18 percent to almost 7 million residents, according to the U.S. Census Bureau. Of the largest U.S. metropolitan areas, only Dallas-Fort Worth-Arlington added more residents during that time period, and Houston’s growth rate bested DFW’s 17 percent increase. With such a population growth, industrial landlords have been able to maintain and even increase asking rates, which have up-ticked slightly from last year to 49 cents per square foot, according to JLL.
“When the oil market dropped, we got a little cautious,” Brindley said. “Somehow, we were behind the curve. Whenever markets were getting e-commerce buildings, we weren’t. Now we’ve gotten them.”
Virtual to reality
Nowhere is this new trend better illustrated than with Amazon.com. In March 2018, the world’s largest online retailer opened a 1.2 million-square-foot fulfillment center in Katy, and five months later opened an 855,000-square-foot building at Pinto Business Park in north Houston.
The Katy project speaks to varying vacancy rates within Houston that reflect shifting demand. True to a real estate market that continues to evolve, vacancies are lowest in Houston’s central business district, and highest in the outlying north and northwest subregions, where the concentration of speculative projects is highest, according to Talhelm of JLL. Meanwhile, Amazon.com and Costco are proving the Katy area to one where industrial developers aggressiveness is paying off.
“Some of what’s getting built today is somewhat pioneering,” said Hines’ Meyer. “But there’s a critical mass of tenants locating in the Katy area. It’s interesting from a logistics perspective because, from that corridor, you can get to San Antonio and Austin in a little over a two-hour drive.”
As for the near future, both Talhelm, who represents both tenants and landlords, and Brindley said that steady asking rates reflect a market where landlords remain confident that they will find tenants for their spec properties without resorting to discounting.
“I think it’s too early to tell,” said Talhelm, in response to a question about whether industrial developers risk overbuilding in Houston. “This is the first quarter where new construction is outpacing absorption, but it hasn’t happened over a long enough period of time to call it a trend.”