REDnews Houston Industrial & Logistics Summit A recap of the event in a region which is not

REDnews Houston Industrial & Logistics Summit Recap

BY RAY HANKAMER

Rives Nolan

Senior Moderator: Todd Phillips

Justin Robinson

Panel 1-2020 Industrial Real Estate Market Overview

Jeff Venghaus Kevin Sager David Wheeler

Moderator: Rives Nolan, CenterPoint Properties Panelists: Justin Robinson, Stream Realty Partners; Jeff Venghaus, JLL

Takeaway: Analysts who say Houston is overbuilt in industrial don’t understand our vibrant market, which is not one “market” but several diverse submarkets, each with its own dynamics and demand generators. Demand is currently strong, with lots of prospective tenants looking. 2020 had two strong quarters: the first and last, and 2021 will see vigorous leasing while construction slows marginally due to rising land and materials costs.

Bullets:

• Houston basically has two separate industrial market segments: oil & gas & chemical plant-related manufacturing, and eCommerce/retail distribution.

• There is lots of new supply, and tenant demand slowed during the Covid year, but is expected to come booming back in 2021; 18 million square feet of tenants currently looking for space.

• Overall bullish on industrial, with crane-served manufacturing market a little slower than e-Commerce side.

• Houston is very resilient; people want to live here; population is growing; 7 million consumers in our trade area and Covid has sharply accelerated the e-Commerce home delivery trend, requiring distribution centers near their customers.

• Class B industrial is thriving; while it is older, it is often much better located, nearest to the most dense population concentrations; many Class B properties have 22-24 ft. clear height while new developments serve tenant demand up to 40 ft.; Class B owners are smiling since their lease rates are rising in step with new-build warehouses; in some cases their rents are even exceeding Class A rents; Class B tenants put up with older buildings in return for being close to customers, resulting in lower transportation/delivery costs, which offset other inconveniences. • One-third of all Houston industrial inventory is in NW sector, which is the population density epicenter of our metro area; ‘speed to market’ is key, with consumers demanding shorter and shorter delivery times.

• Although riskier for developers, spec space is important to accommodate tenants in a hurry to enter our market; many deals have quick fuses and tenants don’t want to wait for build to suit in many cases.

• Some developers are creating parks with some spec warehouses but also padready sites with all detention, utilities, and engineering already done, cutting months off front end construction time; developers are finding ways to compress development period to serve prospective tenants with ‘short fuses’.

• Trend is to ever-higher clear heights and to more trailer storage, and employee parking for e-Commerce facilities which have many employees; one warehouse tenant required 40,000 square feet of office buildout inside the warehouse to consolidate all employees at the industrial site.

• Freeway ingress and egress is very important; time is of the essence; available industrial land is getting further and further out.

• Main submarkets in Houston metro area are: SW, W, and NW; the West submarket is five hours from 15 million consumers, including DFW, the I-35 corridor, and the Valley, as well as the Golden Triangle and Louisiana; the other main market is the Port, and due to land scarcity there are more and more barriers to entry there, while at the same time incoming cargo is growing rapidly for distribution; the N submarket is struggling with 14% vacancy, due to overbuilding.

• Flood plain re-designations have required more square feet for each industrial site, and this requirement is exacerbated by vastly increased demand for parking, i.e. impervious cover; Port industrial support facilities are moving east of Baytown into W. Chambers County; the Port submarket has grown from 20 million square feet to 45 million in ten years.

• The positive aspect of Houston industrial is that due to flat topography we have unlimited expansion options.

Charlie Meyer Gary Mabray Craig Rhodes

• Availability of competent labor is one of the first boxes incoming tenants want to check, and as manufacturing for oil & gas ramps down, there are many employment cross-over options for laid off employees; the NW submarket has lots of good available labor.

• Huge deals up to 500,000 square feet each are being negotiated at present; not long ago the average deal was 50-60,000; much larger now.

• Cold storage is a growing part of local industrial demand.

• Supply chain experts say ‘we are just in the 3rd inning of e-Commerce expansion, in a 9 inning game’; warehousing, logistics, and overall distribution are all adjusting to the new ‘game’.

• Driven by lower interest rates is the trend of tenants to acquire the buildings they occupy; this is happening during a lull in overall investment interest in Houston industrial by investors who can’t stop thinking of Houston industrial as only oil & gas oriented; cap rates continue to compress, and currently are between 4.5 and 5; user purchases of their buildings removes available supply from market; industrial in Houston has boomed even with oil prices hitting lows in last twelve months-that should send a signal to the investment community that industrial growth is now based on population growth here, and not the oil & gas industry.

Walker Barnett Maureen Solomon Bob Wheless

Panel 2-The State of Industrial Development

Moderator: Kevin Sager, EastGroup Properties Panelists: David Wheeler, Hartman REIT; Charlie Meyer, Lovett Industrial; Gary Mabray, Colliers International

Takeaway: Development is moving forward apace, as builders adjust to all the changing factors in the market, such as rising construction and land costs, changing tenant and permitting requirements, and evolution of the logistics of

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