Houston’s E-Commerce Industrial Demand Is Still In Its Infancy
Industrial warehouses and distribution centers are among the most coveted types of commercial real estate right now.
Unlike the hard-hit office and retail sectors, large industrial users like e-commerce retailers have seen demand for their products skyrocket, fueling a need for more space.
“I've got four words. Anything leased to Amazon. That's the safest asset class right now,” Duke Realty Senior Vice President of Leasing and Development David Hudson said during a Bisnow webinar June 23.
The coronavirus pandemic forced many more people to use online shopping to meet their needs. That caused online sales to soar, and while that volume may be temporarily inflated, the need for future expansion is there.
“Our team has always felt like e-commerce, particularly for Houston, is still in its infancy, especially when you look at our size population compared to similar-sized metros,” Stream Realty Partners Vice President Jeremy Lumbreras said. “Most of these larger e-commerce users only have a fraction of the footprint as they do in some of these other markets.”
Logistics Property Co. Senior Vice President Bob Wheless noted that the intersection of I-10 West and Katy has been a popular area for distribution and logistics centers, because of the proximity to so many rooftops. Wheless said that within 200 miles of Katy, an e-commerce retailer could have access to about 15 million people.
“E-commerce tends to flock towards a demographic slice of life, lots of concentrated rooftops, and that's one area we're going to see, I think, continued e-commerce growth,” Wheless said.
Aside from large e-commerce distribution centers, Lumbreras said that the other popular asset type is Class-B institutional industrial space catering to 40K SF to 60K SF users.
“Most of these properties are more infill, closer to nature, closer to population centers, and so they're desired by the tenant base just because of that location, which is really irreplaceable,” Lumbreras said.
“While these buildings have [their own issues], when you're comparing inefficiencies, when you're comparing them to new construction, like shorter clear heights and shallow truck courts — what they lack in some of these amenities, they make up in location.”
Lumbreras said the number of inquiries and tour activity bottomed out about three weeks ago, but things have already started to rebound to pre-coronavirus levels. The biggest challenge is that many prospective clients aren’t taking the next step: sending proposals, negotiating leases or signing deals.
“They’re stuck in that investigative phase,” Lumbreras said.
While there is pent-up demand for inquiries and tours, many larger companies still have travel restrictions or bans in place for employees. That is having an effect on the movement of bigger investments, where prospective clients aren’t able to physically view a property and tour the market.
“What that's leading to is a really prolonged deal cycle, where previously they were much more compressed — we're seeing these decisions ... take a lot longer,” Lumbreras said.
Despite the challenges, Stream Realty has still managed to do business. Since the stay-at-home orders came into effect in mid-March, the firm has signed 58 leases, amounting to 2.2M SF. According to Lumbreras, 47% of those were either new deals or expansions.
Houston is facing an oversupplied industrial market in the short-term. Around 4.4M SF delivered during the second quarter of 2020, and another 7.6M SF is anticipated to deliver during the third quarter, Lumbreras said.
Hudson said that looking at Houston’s industrial pipeline, the city probably ranks about third in the country for speculative building. As wary investors flock to industrial product over office and retail, that could increase.
“I think we're going to have to live with elevated inventory for a while in Houston. I think longer than two years,” Hudson said.