Last Time The Port Built This Much, It Was Trouble. Not This Time.
In Q1 2009, the Southeast/Port submarket was 20% vacant. Seven years later, the Port is on fire, with an all-time low vacancy around 3.4% and a new batch of major development underway.
With 2.4M SF in the ground, the Port is the most active part of town for industrial spec development. And proving tenant demand is through the roof, the submarket locked in the biggest industrial deals of 2015 just as the year came to a close. We snapped Stream regional managing partner Kyle Valentine, PrinREI director Casey Miller and Stream managing partner Justin Robinson in front of Bay Area Business Park Phase 2 yesterday afternoon. The project is one of the biggest spec developments underway—four buildings totaling 829k SF—and just inked 566k SF to Dunavant Distribution Group and 480k SF to Floor & Décor Outlets of America on New Year’s Eve. Dunavant’s deal spans two of the new buildings, bringing the phase to 70% occupancy ahead of its September delivery. (Floor & Décor is backfilling Phase 1 space, some of which will be vacated by Dunavant.) It’s a huge pre-lease, particularly for an area that traditionally hasn’t had a strong pre-lease market.
In fact, absorption hasn’t always been healthy, Cushman & Wakefield executive managing director John Nicholson (here hiking with his wife, Maggie, in Colorado) tells us. The Port had previously been overbuilt with large distribution centers. But pre-leasing has been healthy around the Port for the last 24 months, for both rail- and non-rail-served facilities. Stream data shows 2.4M SF underway or recently delivered, with 1.2M SF of it spoken for. Over the last 12 months, John has been busy with some sizable deals. He repped Frontier Logistics, which leased all 600k SF at 225 RailPort, the largest build-to-suit at the Port. Avera developed the project, and he just sold it to Industrial Income Trust. A few miles west on Highway 225, John repped Modern Polymers’ lease for 300k SF at Port 225 from Clarion. A little further in, John repped XPO Logistics, which leased 210k SF at 11503 Highway 225 from Liberty Property Trust. There are other major deals coming down the pipeline over the next 90 days, Kyle tells us.
The Southeast submarket’s resurgence is largely thanks to improvements at the Port; Barbour’s Cut and Bayport terminals are undergoing dredging and other improvements that’ll more than double capacity, according to the Port of Houston Authority. It’s all in anticipation of the opening of additional locks at the Panama Canal later this year. The new traffic lane will allow larger vessels (“New Panamax”) to carry over twice as much cargo. John doesn’t expect a huge impact on day one, but rather annual increases in volumes to Houston gradually as many mega-ships will no longer need the land bridge and instead will make their way to ports like Houston, New Orleans, Charleston, Savannah or New York/NJ. Another benefit: Asia will also be able to move freight in larger volumes to the gulf and eastern ports entirely on water instead of through a combination of ships, rail and trucks.
Besides the booming Port and subsequent demand, Kyle says the surrounding industrial is doing better this cycle because developers learned their lessons. The huge distribution centers built around ’09 were built to get ahead of projected demand. It never materialized, so now developers are looking more closely at what tenants would do well in the Port (look no further than BABP Phase 2, rendered here, which is mostly being filled by organic growth from existing tenants) and what amenities they'd need. Developers are building more flexibly. The new BABP buildings are divisible down to 20k SF and have flexible design. For example, Buildings 6 and 7 are designed for general warehousing but can also house H3 and H4 hazardous materials, a unique offering for spec product, and something that drew Dunavant to lease Building 6. And although the Southeast is Houston’s most active industrial spec development submarket today, it’s building roughly half the amount put up in the last cycle.