3 Reasons Houston's Industrial Market Is Gaining On Dallas
Dallas and Houston’s rivalry is taking on a new form as the Bayou City looks to take Dallas' spot as the top industrial market in Texas. Long the underdog, demand for distribution space, port activity and Hurricane Harvey recovery efforts have Houston catching up quickly.
Big E-Commerce Users
The transportation of goods is a major part of the Dallas economy, with more than 175,000 people involved in Transportation and Material Moving Occupations, according to the Bureau of Labor Statistics. This accounts for 7.4% of all jobs in the Dallas Metropolitan Division. Last year Randalls closed a 700K SF distribution center in Houston’s Northwest submarket as part of a consolidation of operations to Fort Worth.
DFW’s industrial market closed out 2017 with nearly 226M SF in occupancy growth — a new record. Warehouse/distribution space recorded the greatest annual net gain out of all product types, posting 24M SF of absorption for 2017.
Wholesale trade employs 160,000 workers in Houston, 5.3% of the region’s total.
Houston has been a latecomer to the unprecedented growth of e-commerce, but it is narrowing the gap. Not only has the city seen multimillion-square-foot investments by Amazon, UPS, FedEx and others, providers for these major distributors are seeking to establish regional distribution and return centers related to online sales.
“Closely tied to e-commerce expansion is population growth throughout metro Houston. Population growth from 2010 to 2016 averaged more than 2,600 new residents per week," Colliers International’s Walker Barnett said. “Houston’s proximity to San Antonio and Austin and relatively soft regulatory environment, as well as its infrastructural assets — the rail network, interstate highway systems and Port Houston complex — all work together to drive demand for industrial space.”
Historically, Houston’s industrial market has been driven by manufacturing, typically taking less space than distributors. But Houston’s population growth has distributors taking another look at the area, increasing the size of deals and demand for space.
Net occupier demand in Houston in the final quarter of 2018 totaled over 1M SF, driven by occupier expansions and new tenant move-ins. Two large players are rumored to be shopping for 1M SF of industrial space in Houston each. Total direct vacant space decreased by 800K SF while total availability decreased by 3M SF, as both direct and sublease offerings were consumed.
Despite being a personal trial for almost every Houstonian, Hurricane Harvey was a boon for Houston’s industrial sector. There was little to no damage to speak of in industrial product, and demand spiked as businesses looked to meet the cleanup and rebuilding needs. While availability decreased marketwide, the North submarket experienced the greatest effect, tightening by 1.2% in the 90 days after Harvey.
"As much as it hurts to say this, Harvey was a net positive for the industrial market," Trammell Crow principal Jeremy Garner said. "Almost half the absorption year-to-date has been in the third quarter. It's easy to point to the specific deals."
An almost 300K SF lease inked by Home Depot was one of several expansion deals signed in the wake of Hurricane Harvey. Lowe's signed a similar lease. Garner pointed out that these deals are not just quick hits; they are three-year deals.
The Port Of Houston
Last year set records for the Port of Houston in container volume. That and the emergence of the Gulf Coast as a globally low-cost petrochemical manufacturer leave Houston’s industrial sector well-positioned entering 2018. While volumes continue to grow at a brisk pace in most U.S. markets, the largest year-over-year gains were seen at the ports of Long Beach, Savannah and Houston, which each increased more than 10% compared with the same time a year ago.
The Panama Canal expansion, completed in June 2016, has fueled Houston’s industrial ascension, particularly in submarkets with Port access. With the goal of providing infrastructure to meet demand, Port of Houston Authority Executive Director Roger Guenther said the Port of Houston brought more than $200M worth of construction contracts to substantial completion. With the improvements, larger ships, some shipping more than 8,000 containers, will be more easily accommodated, drawing more destinations from Asia through the canal.
The canal expansion also enabled the Port of Houston to handle liquefied petroleum gas and liquefied natural gas tankers. The number of transits by LPG tankers nearly doubled from 449 in 2016 to 876 in fiscal year 2017, while the number of transits by LNG tankers jumped to 163 in 2017 from 17 in 2016, according to data from the Panama Canal Authority.
Houston’s Industrial Outlook
Houston’s robust demand is driving higher rents than its northern neighbor. The latest industrial report shows the average industrial rent rate across all product types is $6.15/SF, according to JLL research. The average rent rate in Dallas-Fort Worth was $4.41/SF as of October, per JLL research.
After outpacing move-ins for three of the last four years, deliveries in Houston are almost completely in balance with absorption for 2017, meaning Houston's industrial market will likely stay hot for the foreseeable future. With the price of oil rebounding too, Dallas better watch out.
For the latest on Houston's industrial market, register for Bisnow's Houston's Industrial Dominance event March 29.